UK debt now so big it could overshadow country’s entire economy

Jeremy Hunt explains why inflation is so high from a coffee shop

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Public sector borrowing approached £30billion last month in a dramatic overshoot of the Government’s fiscal watchdog’s predictions. Driven by energy bill support measures and inflation-linked debt, the Treasury forked out the second-highest amount in interest payments to its creditors on record. has plotted the graphs to see just how much the country is on the hook.

Net borrowing for the UK public sector – for which the Government is responsible for the largest share – hit £27.4billion last month, more than double the £10.7billion figure in December 2021.

The figures released on Tuesday by the Office for National Statistics (ONS) show the total to be the highest amount since monthly records began 30 years ago – including throughout the pandemic.

Two principal factors are to blame: increases in interest payable on the Government’s existing debt tied to inflation, and the Government’s energy crisis support schemes.

Roughly £7billion was doled out during the month as part of the Energy Price Guarantee (EPG) capping the average annual gas and electricity bill at £2,500, alongside other measures for businesses and vulnerable households.

Government debt interest payable soared to £17.3billon – the second-highest value since records began in April 1997 – during the month and are expected to hit £116billion this financial year alone.

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Chancellor Jeremy Hunt commented: “Right now we are helping millions of families with the cost of living, but we must also ensure that our level of debt is fair for future generations.

“We have already taken some tough decisions to get debt falling, and it is vital that we stick to this plan so we can halve inflation this year and get growth going again — creating better-paid jobs across the country.”

The borrowing figure came in at almost £10billion over the £17.6billion forecast in November by the Office for Budget Responsibility (OBR), the Government’s independent fiscal advisors.

As a result, public sector net debt excluding public sector banks climbed to £2,503.6billion during the month – around 99.5 percent of the UK GDP. Outside of the height of the pandemic in early 2020, Government debt has not exceeded the country’s annual economic output since 1963.

Inflation hovering around a 40-year high at 10.5 per cent in December is both a blessing and a curse for the Treasury.

As the price of goods rises, consumers pay more in VAT to His Majesty’s Revenue and Customs (HMRC). VAT was found to have risen by just under five per cent on the previous year.

Strong wage growth – which hit a 20-year record high of 6.9 percent in the three months to October – also served to boost tax receipts.

The Treasury collected a total of £74.6billion in December 2022, of which £56.1billion came from taxation – an increase of £3.4 billion on December 2021. The income tax take grew by 9.7 per cent on the year.

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On the other hand, with around a quarter of all Government debt being in bonds index-linked to the rate of Retail Price Inflation (RPI) – a producer-level equivalent to today’s more familiar CPI – interest payments have been pulled upwards by inflation.

As a result, Government day-to-day expenditure rose by 20.8 per cent relative to last December to hit £91.2 billion this year – primarily driven by the cost of servicing public debt doubling.

However, in the first nine months of the 2022/23 financial year the public sector actually borrowed less than OBR had initially forecast – at £128.1billion the total came in £2.7billion less than planned.

Alongside November’s unexpectedly positive GDP growth and widespread consensus that inflation may finally have peaked, there is a growing sense of hope that the end may be in sight. Asked last week about his inflation outlook by the Western Mail, Bank of England governor Andrew Bailey said: “There is more optimism now that we are sort of going to get through the next year with an easier path there.”

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