image source, Getty Images
- Author, Tom Espiner
- Role, Reporter, BBC News
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Government borrowing hit the highest level since the Covid crisis in May, but was lower than the UK’s fiscal watchdog had predicted.
Lending reached £15bn last month, up £800m on May last year.
It means the public sector has spent more than it received in tax and other income, leading to the government borrowing billions of pounds.
It’s the third-highest number for May since records began in 1993, surpassed only by pandemic years.
However, the loan was £600m less than the Office for Budget Responsibility (OBR) had expected.
With the general election looming, whichever party wins will face similar problems on taxes, spending and debt, economists have warned.
“Government borrowing is unchanged, but the fiscal Pandora’s box awaits the next chancellor,” said Michal Stelmach, chief economist at KPMG UK.
“Interest rates are set to remain higher, debt will become more difficult to reduce and spending pressures continue to mount.”
While there were some bright spots in May’s borrowing figures, according to Simon Wells, HSBC’s chief European economist, he pointed out that government debt is at “extraordinary” levels – and the highest since the 1960s.
Government debt as a percentage of the UK’s economic output – commonly known as gross domestic product – was 99.8% last month.
“What’s happened is that public sector debt has gone up, first because of the global financial crisis and then again because of Covid, so it’s at an all-time high,” Wells told BBC Radio 4’s Today programme.
High levels of debt mean public sector finances are vulnerable to higher interest rates, making repayments more expensive. Mr Wells warned that the high debt left less room to deal with any future crisis.
The Bank of England has been raising interest rates in an attempt to reduce UK inflation, but one of the side effects is that the government has to pay more interest on the debt.
Interest on central government debt was £8 billion last month, one of the highest on record.
Tax is a key battleground in the upcoming general election, with the Conservatives, Labor and Lib Dems ruling out increases in income tax, VAT and National Insurance rates.
Cuts to National Insurance have eroded how much money the government receives at a time when politicians are reluctant to spend more on public services.
The Government received £900 million less from National Insurance in May than in the same month last year.
Overall, however, tax receipts rose by £1bn after income, corporation tax and value added tax increased.
Taxes, including income tax, are effectively rising after the government froze thresholds – the amount of money people earn before they start paying tax or pay a higher rate.
Thresholds usually rise in line with inflation, but in 2021 the Conservative government froze most bands in response to Covid.
This has drawn more people into paying higher rates, a phenomenon known as the “fiscal drag”.
A recovery in retail sales
Meanwhile, in separate figures on Friday, retail sales rebounded in May after heavy rain dampened activity in April.
The amount people bought – volumes – rose 2.9% in May, after falling 1.8% in April after bad weather. The value also increased by 3.2%.
Danni Hewson, head of financial analysis at AJ Bell, said it was “no wonder we Brits are obsessed with the weather”.
“A bit of sunshine in the month of May, which helped lift temperatures and spirits, translated into an increase in sales, particularly for clothing and furniture retailers,” she said.
Jacqui Baker, head of retail at audit firm RSM UK, said consumers “stocked up on clothes in May in anticipation of summer holidays and rumors of a heat wave in the UK”.
But she added that “confidence to spend on big-ticket items remains low.”