Rising inflation triples cost of servicing UK national debt

THE Treasury’s debt interest bill tripled last month as soaring inflation escalates the cost of servicing the £2.3trillion national debt.

Interest cost the Exchequer £5.6bn in October, up from £1.8bn in the same month of 2020.

Inflation is driving up the cost of index-linked bonds, which account for almost a quarter of the debt. Inflation is also set to keep on rising, threatening further costs.

This contributed to the £18.8bn budget deficit last month, as government borrowing barely fell on the year despite the end of furlough, the return of full stamp duty on property sales and the ebbing of the pandemic.

It will raise fears the Government is struggling to get its finances back on track when emergency spending should be fading and taxes returning to normal.

Most tax receipts have improved. Income tax, on a pay-as-you-earn basis, brought in £14.1bn last month, the Office for National Statistics said – up £1.1bn on the year as the jobs market improved. VAT was up 2.6pc to £13.1bn as spending increased and tax breaks were wound down. Stamp duty on home purchases hit a new record high, bringing in £1.4bn in the month, up from £833m a year earlier.

Meanwhile spending is surging, despite the furlough scheme’s closure saving £1.5bn compared with October last year and the end of the self-employment income support scheme. It cost £300m a year ago and £200m this October as some late payments were made.

Procurement spending rose by almost 7pc to £17.9bn, while the central Government’s pay bill jumped more than 6pc to £13.6bn. In part this is due to the vaccine programme and Test and Trace.

Samuel Tombs, at Pantheon Macroeconomics, said the risk is growing that the finances will end up worse than the Office for Budget Responsibility predicted at last month’s Budget.

“The 4.2pc year-over-year rise in total managed expenditure in October was well above the 6.3pc drop forecast by the OBR for 2021/22 as a whole,” he said, predicting the Government will have to spend £60.5bn on debt interest, £3bn more than the OBR anticipated.

Rishi Sunak, the Chancellor, said: “At the Budget last month I set out new fiscal rules which will keep debt on a sustainable path in the years to come.”