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High inflation causes interest payments on UK debt to rise

UK government borrowing higher than expected

The UK government had to borrow more than anticipated last month as rising inflation caused debt interest payments to increase.

The Office for National Statistics confirmed that the government’s budget deficit fell to £20.5bn in August from £26bn compared to the same month a year before, as the UK’s economy recovers from the pandemic.

However, the positive impact on national debt was offset by inflation causing interest payments on the country’s debt to go up by 84% year-on-year.

“August delivered another month when what the government raked in was far less than it spent and although the numbers are going the right way, borrowing figures overshot expectations. Tax receipts were up almost across the board with dips only in alcohol and tobacco duty and capital gains tax, the latter suggesting business is taking advantage of new incentives,” said Danni Hewson, AJ Bell financial analyst.

One of the big successes and one of the biggest costs has been the government’s furlough scheme which is now in its dying days.

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“Spend on the scheme in August was just over a billion pounds, an almost 70% decrease compared to the same time last year as the jobs market bubbled and unemployment was kept in check,” Hewson added.

“All the support, all the restrictions have come with a substantial price tag and whilst the deficit might be lower than official forecasts, and the Chancellor might have a touch more wiggle room going into his autumn budget than had been expected, there are concerns.”

Inflation is not just something that’s making us wince when we get to the supermarket checkout, it’s also taking its toll on the public purse.

Hewson said: “Interest payments on all that debt shot up in August and September will be even more painful when you factor in the latest RPI figures. And the medicine for inflation, a rate rise from the Bank of England which is widely accepted to be on its way, will perversely also add to debt costs.”

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