Rishi Sunak borrowed another £14bn last month as debt interest payments hit £7.6bn, the highest for any May on record, the Office for National Statistics said.
The debt servicing cost is 50pc more than the £5.1bn forecast by the Office for Budget Responsibility, as runaway inflation drives up the cost of servicing the national debt.
Around one-quarter of the nation’s £2 trillion debt is linked to the retail price index measure of inflation, which surged to 11.7pc last month.
Debt interest had already been forecast to cost a record £83bn this financial year, so the sharp rise will raise fears this could be an underestimate.
The figures highlight risks to the public finances as the cost-of-living crisis threatens to push Britain into a recession.
FTSE risers and fallers
The FTSE 100 has dropped further this morning as commodity prices slide amid growing recession fears.
The blue-chip index is now down 0.8pc, extending losses racked up yesterday.
BP and Shell were once again the biggest drags on the index, while miners also lost ground as traders reacted to rising Covid cases in China and aggressive interest rate rises by the Federal Reserve.
The domestically-focused FTSE 250 slid 0.7pc, with biggest faller 888 down more than 4pc after it warned on lower revenue for the first half.
Gas prices drop as Germany eyes next stage of emergency plan
Natural gas prices edged lower ahead of a statement from Germany that’s expected to trigger the second stage of the country’s emergency gas plan.
Economy minister Robert Habeck will speak at 10am local time on “energy and supply security”.
Moving to stage two – the “alarm” phase – could mean a change in the law to allow energy companies to pass on cost increases to homes and businesses.
It may also involve firing up more coal-fired power plants to cut down gas consumption.
It comes as flows from Russia remain curtailed, with the Nord Stream pipeline to Germany operating at about 40pc capacity.
The reductions, which Germany has described as political, are fuelling fears of energy shortages this winter.
Benchmark European gas prices slipped 1.3pc in Amsterdam.
FTSE 100 opens lower
The FTSE 100 has started the day on the back foot as recession fears continue to grip markets.
The blue-chip index fell 0.5pc to 7,055 points.
Reaction: Sunak’s headroom squeezed amid cost-of-living crisis
Paul Dales, chief UK economist at Capital Economics, warns the weak economy will limit Rishi Sunak’s ability to help households.
The larger-than-expected £14.0bn rise in public borrowing in May is an early blow for the Government on a day when it is expected to lose two by-elections. What’s more, with the economy weakening and interest rates rising, the public finances will probably perform worse this year than the OBR forecast.
Borrowing is still declining relative to a year ago as the pandemic support unwinds, but it is now declining slower than the OBR forecast in March’s Spring Statement.
This means that after just two months of the 2022/23 financial year, borrowing is already £6.4bn higher than the OBR expected.
And that’s before taking into account the net £10.3bn handout by Chancellor last month to help households cope with the cost of living crisis as well as the full boost to borrowing from higher interest rates, higher inflation and weaker economic activity that’s down the line.
As such, we think borrowing this year will come in closer to £110bn rather than the £99bn the OBR is forecasting.
That would reduce the room for the Chancellor to cut taxes and/or provide more grants to households when a further rise in CPI inflation to 10-11pc in October worsens the cost of living crisis.
Reaction: Debt reduction this year is a ‘long shot’
Michal Stelmach, economist at KPMG was debt reduction this year “remains a long shot”.
The pace of deficit reduction is set to slow over the coming months, with the government’s latest package of cost of living measures providing a net fiscal loosening worth 0.4pc of GDP in 2022-23.
We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.
Sunak: I’m being responsible
Chancellor Rishi Sunak has issued a statement following the latest borrowing figures, insisting he’s being “responsible” with the public finances.
Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.
That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.
Tax rises help bring down borrowing
Here’s some more on the borrowing figures from my colleague Tim Wallace:
So far the Government has borrowed £35.9bn over April and May, which is above the £29.5bn deficit the OBR expected for the opening months of the financial year.
However, monthly borrowing is still down on May 2021’s £18bn, as tax receipts increased by more than £3bn as the economy recovered, and spending on subsidies dropped by £4.9bn with the end of furlough and its equivalent support for the self-employed.
VAT raked in £14.2bn in the month, a jump of more than 10pc on the year. Stamp duty brought in £1.3bn for the exchequer, up almost 80pc compared with May 2021 when the tax holiday was still in place.
Pay as you earn income tax receipts rose £1.4bn to £16.3bn on the strong jobs market. Compulsory social contributions jumped by more than 15pcto £14.4bn, as the Chancellor increased the rate of national insurance charged to workers and their employers.
Inflation drives up UK debt costs
The Government borrowed more than forecast in May, highlighting risks to the public finances as the cost-of-living crisis threatens to tip Britain into a recession.
Rishi Sunak borrowed another £14bn last month, which was £2bn higher than economists had forecasts.
Debt interest payments hit £7.6bn – the highest for any May on record, according to the ONS.
The surge in debt servicing costs reflects a jump in the retail price index measure of inflation, which hit 11.7pc last month.
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2) British car battery champion seeks to woo Elon Musk’s Tesla Plus: Electric car charging to face 10-minute delays amid energy rationing
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4) Crypto giant Tether targets UK investors with sterling ‘stablecoin’ The launch of a sterling product should make it easier for British traders to access cryptocurrencies
5) Sir Jim Ratcliffe to bring gas to Europe as bloc scrambles for supplies Chemicals giant Ineos will import as much as 1.4 million tonnes of gas a year
What happened overnight
Hong Kong stocks started with a gain this morning, following the previous day’s hefty losses. The Hang Seng Index climbed 0.7pc.
The Shanghai Composite Index ticked up 0.06pc, while the Shenzhen Composite Index on China’s second exchange added 0.2pc.
Tokyo shares opened higher, with the benchmark Nikkei 225 index rising 0.2pc.
Coming up today
Corporate: Naked Wines (full-year results); Serco (trading statement)
Economics: Services PMI (UK, US, EU), manufacturing PMI (UK, US, EU), composite PMI (US, EU), GfK consumer confidence (UK), economic bulletin (EU), jobless claims (US), bank stress test info (US)