In August, interest rates on British government debt reached a new high due to soaring inflation.
The Office of National Statistics (ONS) said that interest due reached £8.2bn during the month, £1.5bn more than the same time last year, and the highest August number since records began in 1997.
The high-interest payments are a result of the government’s plans to borrow billions to assist homeowners with their energy costs.
According to reports, the government will also announce £30 billion in tax cuts in a mini-Budget on Friday.
In August, the ONS reported that government borrowing – the difference between spending and tax revenue – was £11.8 billion. That is £2.6 billion less than August 2021, but $6.5 billion more than two years ago, before the pandemic.
It is also double what the Office of Budget Responsibility, the government’s independent budget watchdog, predicted for August.
This, according to Martyn Beck, senior economic advisor of the EY Item Club and former Treasury economist, is related to the recent weakness of the British economy.
According to him, this meant that fewer taxes were being collected, while the government had to spend more on debt interest payments.
The recent increase in loan interest rates is mostly due to increasing inflation, according to the ONS.
This is because the interest paid on government bonds increases in tandem with the Retail Prices Index, which reached 12.3% in August. Since last year, the government’s interest payments have risen by 22.1%.
Mr. Beck, however, stated that he was “not especially” concerned about the high debt levels because the UK’s borrowing costs were “still relatively low” in comparison to long-term historical records.
The Chancellor of the United Kingdom, Kwasi Kwarteng, backed the government’s choice to invest billions to assist households and companies in coping with the energy price shock.
On Friday, the new chancellor will give an emergency mini-Budget outlining how the government can finance its previously announced initiatives to combat the growing cost of living in the United Kingdom.
He stated that the government’s first aim was to “develop the economy and raise everyone’s living standards – with robust economic growth and solid public finances working hand in hand.”
“As chancellor, I’ve committed to reducing debt over the medium term,” he added.
“However, in the case of a significant economic shock, it is imperative that the government intervene immediately to assist individuals and companies, just as it did during the pandemic.”
As a result of a ceiling on wholesale energy costs, the government has announced that energy rates for some businesses would be halved this winter.
The assistance will apply to contracts beginning on October 1 and to fixed contracts signed since April.
The action follows the announcement by Prime Minister Liz Truss that annual family energy bills would be capped at £2,500 until 2024.
Ms. Truss has also pledged to reverse the increase in National Insurance enacted by her predecessor, Boris Johnson, using Friday’s fiscal event.
As part of a post-Brexit overhaul of City regulations, she is also anticipated to reduce corporate tax and eliminate a bonus threshold for bankers.
According to PwC economist Hoa Duong, the government’s intentions raise concerns about the future health of the public finances. She stated that they are also likely to fuel inflation.
“Although these measures have the potential to assist stressed individuals and businesses, any significant action will exacerbate the difficulty of managing public sector debt, which has £58 billion to be repaid by August 2022.
Even if tomorrow’s meeting of the Bank of England’s Monetary Policy Committee leads to a further interest rate hike, the size of this package will limit the impact of such a move on containing inflation, and several rate hikes are probable shortly.
