The Daily Telegraph
Debt fears hit calls for spending spree
The Government spent £8.7bn servicing its debts in June, equivalent to £312 for every British household
Rishi Sunak is expected to push back against demands for a post-covid spending spree after rising inflation and the burden of pandemic support measures sent interest payments on national debt to a record high. The country spent £8.7 billion on servicing its debts in June, enough to fund the Department for Business for a year. There is growing alarm in the Treasury that rising inflation could trigger a further jump in interest payments in coming months.
RISHI SUNAK is expected to push back against demands for a post-covid spending spree after rising inflation and the burden of pandemic support measures sent interest payments on Britain’s debt to a record high.
The country spent £8.7bn on servicing its debts in June, enough to fund the Department for Business for a year and equivalent to £312 for every British household.
There is growing alarm in the Treasury that rising inflation could trigger a further jump in interest payments in coming months as the Chancellor seeks to resist further uncosted spending pledges by Boris Johnson.
Samuel Tombs from Pantheon Macroeconomics said: “We do not sense that the Conservatives are willing to spend the large sums that would be needed to deliver on their ‘levelling up’ pledge.”
However, last night ministers confirmed a 3pc pay rise for NHS staff that will cost hundreds of millions of pounds.
Britain is particularly exposed to rising inflation because almost one quarter of the nation’s £2.2trillion debt is linked to the retail price index (RPI) – a far higher share than in any other advanced economy. The RPI rose by 3.9pc in June, up from 1.1pc a year earlier.
The Government borrowed another £22.8bn in June overall, taking the total national debt to £2.2trillion or 99.7pc of GDP – the highest as a share of output since 1961. In the first three months of this financial year, the Government has had to pay £17.9bn to service what it owes – almost 60pc more than during the same period of 2020.
At present, the country is still benefiting from ultra-low interest rates and a compliant Bank of England which has supported the bond markets through its vast money-printing programme. But mandarins fear disaster if Threadneedle Street hikes interest rates to combat inflation, with a single percentage point increase adding an estimated £21bn to the country’s annual bill.
Richard Hughes, chairman of the Office for Budget Responsibility, said rising prices could prompt the Treasury to consider cutting back its use of indexlinked bonds, reducing the risk posed by inflation but disappointing savers and pension funds which rely on the instruments to preserve the value of their cash.
The public finances are increasingly exposed to changes in interest rates. Mr Hughes said: “In the past the Government had more time to respond to rising interest rates when [gilts] had a median maturity of seven years, than now when it has a median maturity of two years. It means the rest of public spending and tax would need to respond more quickly if interest rates start to rise.”
However, the June spending figures also included signs that the economy is bouncing back. Government receipts climbed to £62.2bn for the month, up from £9.5bn a year earlier, with income tax, fuel duty and VAT revenues sharply higher as the reopening takes hold.
Expenditure none the less remained high. Central government bodies spent £84.1bn in the month, £2.5bn more than a year ago. A large share of this is thought to be for the NHS Test and Trace programme and the vaccines.
Job Retention Scheme payments totalled £6.7bn in the past three months, down from more than £28bn in the same period of 2020.