Deficit rises as national debt hits £1.75 trillion

PUBLIC borrowing increased in June as higher interest rates on government debt pushed the deficit reduction plan into reverse.

The deficit climbed to £6.9bn last month, up £2bn compared with June 2016. In this financial year so far the Government has already borrowed £22.8bn, a rise of £1.9bn on the same period of last year. The national debt now stands at £1.75 trillion, excluding the bank bailouts, which is equivalent to 87.4pc of GDP, a record high.

The Government’s tax haul is on the rise as the economy grows – so far this financial year current tax receipts have come in at £164.2bn, up 4.7pc on the £156.8bn raised last year. However, total current spending has risen by 5.6pc to £176.7bn, so the Government has had to borrow more to plug that widening gap. Higher interest payments on the national debt were a particularly large cost.

Financing the debt cost £4.9bn in June alone, a rise of more than £1bn from £3.7bn in the same month of 2016.

Higher inflation is driving this as bond payments linked to the price index rise as inflation takes off.

“While nominal gilt yields remain relatively low, rising inflation means that the Exchequer is facing higher costs from its index-linked issues,” said Philip Shaw, an economist at Investec.

“The Office for Budget Responsibility estimates that each 1pc increase in inflation costs the Government an additional £4.1bn in debt interest. Our inflation (retail prices index) forecasts show a 2.4 percentage point rise over 2017-18 as a whole, implying higher interest payments of £9.8bn.”

The OBR had anticipated a rise in borrowing this year in its March forecasts, so the deterioration in public finances is not a major surprise – though it is still uncomfortable for the Government, which is facing calls to increase spending more, even in the face of rising borrowing.

“Today’s release shows that our national debt, at £65,000 for every household, is still too high and leaves us vulnerable to any future shocks,” said a Treasury spokesman.

“That is why we have a credible fiscal plan to get debt falling and deliver the sound public finances needed for a stronger economy and higher living standards.”