Government interest payments on borrowing soar as inflation rises

Soaring inflation has driven interest payments on the public debt to their highest level since records began nearly 25 years ago.

Interest payments hit £6.1bn in January, up from just £1.6bn in the same month a year ago, the RPI measure of inflation used on government debt payments having reached 7.8%.

The rise is still a far cry from the all-time high of £9bn in interest rate payments made in June last year, but the interest rate is set to rise further as inflation continues to rise.

The latest increase in interest rate payments comes as the Office for National Statistics (ONS) revealed tax returns brought in £18.4billion in January, up from £16.4billion in January 2021.

Higher tax levies helped borrowing levels to a surplus of £2.9bn, from a deficit of £2.5bn a year earlier.

This amount was above expectations, but remains £7 billion below the surplus recorded in January 2020 before the pandemic.

The ONS added that public sector borrowing from the end of March to December stood at £138.5billion – the second highest since records began in 1993.

The data also showed that public sector debt, excluding public sector banks, was £2.32 trillion at the end of the month, or around 94.9% of gross domestic product (GDP) .

Chancellor of the Exchequer Rishi Sunak said: “We have provided unprecedented support throughout the pandemic to protect families and businesses and it has worked, with the UK experiencing the fastest economic growth in the world. G7 last year.”

The UK suffered the steepest economic downturn in 2020 of any G7 country before tipping over to the strongest growth in 2021.

Mr Sunak added: “But our debt has increased significantly and public finances are under further pressure, notably due to rising inflation.

“Keeping public finances on a sustainable path is crucial so that we can continue to help the British people in times of need, without burdening future generations with high debt repayments.”

Isabel Stockton, a research economist at the Institute for Fiscal Studies, said the numbers suggest borrowing remains likely to be lower than the budget forecast.

She added: “Some have suggested that borrowing figures below expectations should lead the Chancellor to provide more support to households, in addition to that announced earlier this month, to cope with the rapid increase in the Cost of life. In truth, the latter has little to do with the former.

“The Chancellor could certainly delay tax hikes, increase benefits with a more up-to-date measure of inflation in April or implement additional one-off support.

“However, tax hikes have been introduced to address long-term challenges, notably in the areas of health and social care, which have by no means become less pressing.

“If the Chancellor decides to delay tax hikes this spring, he will need to find ways to credibly commit to other means of dealing with these spending pressures.”

James Smith, research director at the Resolution Foundation, pointed out that this year’s tax revenue so far is more than £25billion higher than the OBR forecast last autumn.

He added: “There are signs of faster income growth for high earners, who pay a higher marginal rate of tax.

“The warning in an otherwise welcome set of figures is the £6.1bn rise in debt repayments resulting from higher inflation.”