Surging debt interest forces Sunak to borrow £14bn as inflation crisis bites

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.

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 15pc to £14.4bn, as the Chancellor increased the rate of national insurance charged to workers and their employers.

Mr Sunak said he is “being responsible with the public finances”.

He said: “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.”

Michal Stelmach, an economist at KPMG, warned that the Chancellor’s ability to reduce government debt this year remained “a long shot”.

He said: “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.”

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