The Chancellor of the Exchequer, Nadhim Zahawi, acknowledges the strain on the public finances, as analysts assert that the latest figures will necessitate “difficult decisions” for whoever wins the Conservative leadership contest.
Interest payments on government debt have increased by 63% over the past year due to soaring inflation, according to official data.
The Office of National Statistics (ONS) published data indicating that the United Kingdom borrowed more than anticipated in July because public spending exceeded tax and other revenue.
Government borrowing hit £4.9bn in July, according to the ONS, dwarfing the £0.2bn anticipated by its independent financial watchdog, the Office for Budget Responsibility.
It was also substantially ahead of the £2.8bn expected by economists and takes the total budget deficit for the year so far to £55bn.
Back in July 2019, before the COVID-19 pandemic which drove a historic spike in government borrowing, the public finances were in surplus by £0.9bn.
As a result of Retail Price Index (RPI) inflation, the government’s debt costs rose to £5.8 billion in July, an increase of £2.3 billion from the previous year.
This week, the ONS reported that the RPI rose to 12.3% in July, while the broader Consumer Price Index (CPI) inflation figure reached a new 40-year high of 10.1%.
July government spending increased by £3.4 billion to £76.5 billion, according to the most recent data.
In response to the data, the Chancellor of the United Kingdom, Nadhim Zahawi, stated, “I am aware that rising inflation is causing difficulties for families and businesses, as well as straining public finances by increasing the amount we spend on debt interest.”
“In the coming weeks and months, the government will continue to assist those who need it most, such as the elderly, those with low incomes, and those with disabilities, to assist people during this difficult period.
“We are taking a balanced approach: protecting public finances while providing substantial assistance to households.”
The latest figures, according to Michal Stelmach, senior economist at KPMG UK, will force the next chancellor, following the Conservative leadership election, to make “difficult decisions.
He added, “The balance of public finance risks has shifted to the downside.”
“The cost of living crisis will likely necessitate additional assistance to households, while a sluggish economy will exert downward pressure on receipts, making fiscal targets less and less attainable.”
Foreign Secretary Liz Truss, the frontrunner in the race for the leadership of the Conservative Party, has stated that she will cut taxes, whereas her opponent, former chancellor Rishi Sunak, has cautioned that this could fuel inflation and has advocated for more direct, targeted support.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, estimates that if Ms. Truss wins, Britain’s budget deficit will reach approximately £170 billion in the current fiscal year, which is roughly three times the size it was before the pandemic.
New research indicates that consumer confidence is at an all-time low as a result of “acute concerns” regarding the rising cost of living and bleak economic outlook.
The Bank of England has warned that rising inflation is likely to push the United Kingdom into a recession by the end of the year.
