Chancellor Rishi Sunak borrowed another £14bn last month as national debt interest payments hit £7.6bn amid rocketing inflation, the highest for any May on record.
The figures from the Office for National Statistics show that surging levels of inflation sent interest payments on government debt to a record-breaking £7.6bn – £3.1bn higher than a year earlier. That means interest payments on the UK national debt jumped by 70% compared with a year earlier.
It is also the third highest debt interest payment in any month and the highest seen in any May since records began in 1993.
The debt servicing cost is 50% more than the £5.1bn forecast by the Office for Budget Responsibility, as inflation drives up the cost of servicing the national debt. Index-linked gilts make up 25% of UK government debt.
Government borrowing was £4bn less than in May last year, but was still the third-highest May borrowing since monthly records began in 1993 and £8.5bn more than in May 2019, before the pandemic struck.
Sunak warned that rising inflation is a challenge to the public finances: “Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.
Read more: UK inflation hits fresh 40-year high of 9.1%
“That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.
“Being responsible with the public finances now will mean future generations aren’t burdened with even higher debt repayments, and we can secure our economy for the long term.”
Tax take increased year-on-year reflecting the reopening of the economy; Value Added Tax revenues were up 10%, and Business Rates bringing in 13% more than a year ago. That helped to lift tax receipts to £48.3bn, an annual increase of £3.4bn.
Paul Dales, chief UK economist at Capital Economics, warns the weak economy will limit Rishi Sunak's ability to help households.
“As such, we think borrowing this year will come in closer to £110bn rather than the £99bn the OBR is forecasting.
“That would reduce the room for the chancellor to cut taxes and/or provide more grants to households when a further rise in CPI inflation to 10-11% in October worsens the cost of living crisis.”
Inflation hit a 40-year high of 9% in April and official data on Wednesday showed it increased again in May, to 9.1%.
Read more: Average UK food shop rises by £380 a year
The Office for Budget Responsibility (OBR) estimates that the mammoth debt interest payments will send government borrowing up to £22.3bn in June, up from £18.8bn a year earlier.
It is also forecasting that debt interest payments will cost central government £87.2bn over the financial year ending March 2023 as the impact of sky-high inflation ricochets through the economy.
"The budget deficit continued to fall in May, with year-to-date borrowing of £35.9bn down £6.4bn on last year. But it was £6.4bn above our most recent forecast profile, the OBR said.
"This overshoot reflects both lower receipts and higher spending – with debt interest spending in the year to date a fifth higher than forecast thanks to the jump in RPI inflation. With the Bank of England now expecting CPI inflation to reach 11%later this year, debt interest can be expected to continue to overshoot our forecast," it added.
Michal Stelmach, senior economist at KPMG UK, warned that Sunak’s aims to cut government debt this year will be a “long shot”, due to the impact of the cost-of-living crisis on economic growth and support measures launched to help reduce its impact.
He said: “We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “In addition, the OBR’s full-year forecast for debt interest payments looks too low by about £15bn, if we incorporate our latest forecast for RPI inflation.”
Watch: How does inflation affect interest rates?