Inflation pushes UK debt interest costs to August record

Soaring inflation led interest costs on UK government debt to hit a new record for August.

Interest due reached £8.2bn during the month, £1.5bn more than last year and the highest August figure since records began in 1997, the Office for National Statistics (ONS) said.

The high interest payments come as the government prepares to borrow billions to help households with energy bills.

It will also reportedly unveil £30bn of tax cuts in a mini-Budget on Friday.

The ONS said government borrowing – the difference between spending and tax income – was £11.8bn in August. That is £2.6bn less than August 2021 but £6.5bn more than before the pandemic two years ago.

It is also twice the level forecast for August by the Office for Budget Responsibility, the government’s independent fiscal watchdog.

Martyn Beck, chief economic advisor to the EY Item Club and former Treasury economist, said this was due to the UK economy being “pretty weak over the last few months”.

He said it meant less was being generated in taxes, while the government had to spend more on debt interest payments.

The recent higher in debt interest costs is largely a result of soaring inflation, the ONS said.

This is because the interest paid on government bonds rises in line with the Retail Prices Index measure of inflation, which hit 12.3% in August. The government has seen its interest payments rise by 22.1% since last year.

But Mr Beck said he was “not particularly” worried about the high debt levels, as the UK’s borrowing costs were “still pretty low” compared to long-term historical records.

Chancellor Kwasi Kwarteng defended the government’s decision to spend billions on helping families and businesses cope with the energy price shock.

The new chancellor will deliver an emergency mini-Budget on Friday to set out how the government will fund its recently-announced plans aimed at tackling the rising cost of living in the UK.

He added that government’s priority was to “grow the economy and improve living standards for everyone – with strong economic growth and sustainable public finances going hand in hand”.

“As chancellor, I have pledged to get debt down in the medium term,” he added.

“However, in the face of a major economic shock, it is absolutely right that the government takes action now to help families and businesses, just as we did during the pandemic.”

The government has announced that energy bills for some businesses are set to be half anticipated levels this winter through a cap on wholesale energy costs.

The support will apply to contracts from 1 October and fixed contracts taken out since April.

The move comes after Prime Minister Liz Truss announced typical household energy bills would be limited to £2,500 a year until 2024.

Ms Truss has also promised to use Friday’s fiscal event to undo the rise in National Insurance brought in by her predecessor Boris Johnson.

She is also expected to cut corporation tax and remove a cap on bankers’ bonuses as part of a post-Brexit shake-up of City rules.

The government’s plans raise concerns about the future strength of the public finances, said PwC economist Hoa Duong. They are also likely to stoke inflation, she said.

“While these measures could potentially support individuals and businesses under strain, any large intervention will create further challenges for managing public sector debt, with £58bn to balance already in the financial year to August 2022.

“The size of this package means that even if the Bank of England’s Monetary Policy Committee meeting tomorrow results in a further interest rate hike, the impact of such a decision on restraining inflation would be limited and multiple hikes are likely in the near future.” – bbc.com