Future generations at risk from UK debt burden: Sunak

Bloomberg

UK Chancellor of the Exchequer Rishi Sunak pledged to bring borrowing under control to “avoid saddling future generations with debt” after official figures showed debt servicing costs rocketed.
Government borrowing more than halved in the fiscal year through March as Covid-19 support programs were phased out and tax receipts recovered strongly, the Office for National Statistics (ONS) said on Tuesday.
The bill for servicing the government’s debt jumped 77% to 69.9 billion pounds ($89 billion) because of higher inflation and interest rates. In March alone, the interest bill was 2.9 billion pounds, 1 billion pounds higher than a year earlier.
“Public debt is at the highest levels since the 1960s, and rising inflation is pushing up our debt interest costs, which mean we must manage public finances sustainably to avoid saddling future generations with further debt,” Sunak said in a statement.
Public sector debt excluding public sector banks was 2.34 trillion at the end of March 2022, or around 96.2% of GDP. It’s now at levels not seen since the early 1960s.
The chancellor unveiled a 22 billion support package for households in March and is under pressure to deliver more help as the cost of living crisis escalates. Disposable incomes are forecast to shrink by the most since the 1950s this year as prices rise faster than wages.
A bigger package would drive borrowing higher. At the same time, economists warned that weakening growth also poses a threat to the public finances.
The ONS figures showed that the budget deficit for March came in just below expectations at 18.1 billion pounds, leaving the shortfall for 2021-22 as a whole at 151.8 billion pounds.
That was the equivalent of 6.4% of GDP, down from a high of 14.8% in 2020-21 when the coronavirus pandemic was raging. It was the third-highest financial year borrowing since records began in 1947, but less than half of the 317.6 billion pounds borrowed in the same period last year.
The improvement reflected the phasing out of pandemic-era spending programs such as furlough and an economic recovery that has delivered far more tax revenue than originally forecast.
However, the chancellor is facing headwinds from higher inflation and interest rates, which are pushing up debt servicing costs, and the sharp rise in staff costs after a 250,000 increase in the public sector workforce to deliver vaccines and testing during the pandemic.
On top of the 30.5 billion-pound increase in the debt servicing bill last year, public sector pay jumped by 12.7 billion pounds, or 8.3%, to 167 billion pounds.
Debt interest costs spiked because the cost on around a quarter of all government bonds is tied to the retail prices index. That is proving a headache for Sunak as he tries to lower the debt burden and eliminate borrowing for day-to-day spending by the middle of the decade.
Inflation gauged by the Retail Price Index, already at a 31-year high of 9%, is forecast to climb into double digits this quarter. Each 1 percentage-point increase adds more than 5 billion pounds to debt costs.
Government borrowing in 2021-22 was above the 128 billion pounds the OBR forecast at the Spring statement in March.

Bank of England interest-rate increases to combat inflation will deliver an even heavier blow.
Those raise the cost of financing government bonds acquired by the central bank through its quantitative-easing program.
Following the ONS figures, the Debt Management Office said it plans to sell 131.5 billion pounds of gilts in the current fiscal year, 6.8 billion pounds more than estimated last month. Planned net sales of Treasury bills will also increase to 30.2 billion pounds for the period.
Government borrowing in 2021-22 was above the 128 billion pounds the OBR forecast at the Spring statement in March.
The difference reflected the OBR’s prediction that the government would a significantly underspend on investment and a reduced estimate of the future losses on state-guaranteed Covid loan programs like bounce back loans.
The ONS said the OBR expected the official data to fall into line “as provisional data are replaced by final.”
Speaking to Bloomberg earlier this month, OBR Chairman Richard Hughes explained that the Treasury had signaled that the government was struggling to meet its investment plans due to the shortage of manufacturing and engineering staff.
For now, however, the ONS has to use those spending limits until the data on actual spending emerges.