The UK government debt reached 100% of GDP for the first time since 1961 as a result of skyrocketing interest rates and inflation, undermining Prime Minister Rishi Sunak’s commitment to reduce it and dashed hopes for tax cuts ahead of an anticipated general election likely next year.
The depressing milestone was reached in May when spending surpassed revenue by £20 billion ($25.5 billion), exceeding expectations of both private-sector economists and the independent Office for Budget Responsibility.
The budget deficit for the first two months of the fiscal year came to £42.9 billion, which is £2.1 billion higher than the OBR’s projection and nearly twice as high as at the same time last year.
Sunak will find it challenging to implement the significant tax cuts that many Conservatives claim is necessary if the party is to win the next general election. The Tories frequently lag the opposition Labor Party by double digits, according to opinion polls.
The overshoot was almost entirely caused by reasons relating to the inflation crisis, according to statistics from the Office for National Statistics, which has led the Bank of England to hike interest rates from 0.1% to 4.5% since the end of 2021.
In May, household energy bill assistance cost £3.6 billion and benefits inflation indexing increased welfare spending by £2.9 billion.
With wage expenses for May £3.4 billion more than last year – partly because of the National Health Service settlement – striking public sector workers were able to achieve larger pay deals than anticipated.
At £7.7 billion, debt-servicing expenses were marginally lower than they had been a year earlier. These expenses, which have increased spending as a result of raging inflation, were a major factor in the rise in bond payments connected to the Retail Prices Index. Even still, the OBR prediction at the time of the March budget was still £700 million higher.
Overall spending exceeded predictions for May, while receipts came in slightly below forecasts, which is concerning for the prospect of future growth.
The £132 billion borrowing estimate made by the OBR is now likely to be exceeded by £20 billion, according to the EY ITEM Club. The government will likely be “in breach of its fiscal rules” unless the recent surge in market rates is reversed, the forecasting organization warned.
Against its requirement that debt must be dropping as a proportion of GDP by the fifth year of the estimate in its March budget, the government has just £6.5 billion of headroom. Around £20 billion is added for every percentage point increase in borrowing costs, and market rate expectations are presently 1% higher than in March.
It would be obviously unfair to leave future generations with a bill they can’t pay, according to Chancellor of the Exchequer Jeremy Hunt. Since we need to balance the books in order to build the economy, cut debt, and cut inflation in half this year, these difficult but necessary decisions have been made.
The statistics, according to Capital Economics’ deputy chief UK economist Ruth Gregory, “cast further doubt on the chancellor’s ability to unveil big pre-election tax cuts while still meeting his fiscal rules” and suggest that any gift “may be modest or swiftly reversed.”
A Conservative administration would certainly intensify austerity measures in the years following the election, which must be conducted by at least January 2025, according to Martin Beck, the EY ITEM Club’s senior economist.
The chancellor would probably respond by imposing additional post-election spending cutbacks on top of the already difficult-looking spending constraint. Thus, it is unlikely that the real medium-term fiscal policy course will be revealed until the first Budget following the election, according to him.
