Public finances manage January surplus despite £6.1bn interest payment hit

The public finances showed a £2.9bn surplus in January despite a record bill for the month from the impact of surging inflation on the cost of servicing debt repayments.

The Office for National Statistics (ONS) said £6.1bn was spent on debt interest payments during the month, denting January’s usual income tax-led budget surplus which came in at almost £10bn in January 2020.

Economists said that with rates of inflation already running at their highest level for almost 30 years, the interest payments on inflation-linked bonds were only set to rise and limit the chancellor’s room for manoeuvre heading into next month’s spring budget.

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2:30

Chancellor wants to ‘focus’ on GDP

That is because the Bank of England is forecasting inflation will rise sharply in April when rising energy costs feed into the economy.

Strong employment has been credited with keeping tax receipts healthy.

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However, the ONS figures showed that the cost of servicing debt so far this financial year at almost £60bn.

That sum is more than the country’s budget deficit for the year before COVID-19 hit.

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Real wages down in December

Rishi Sunak is under pressure to offer greater support to households, beyond what he has previously announced, as families face up to a hike in the energy price cap of almost £700.

The Bank has forecast it will drive a record slump in living standards.

The chancellor said on Tuesday: “Our debt has increased substantially and there are further pressures on the public finances, including from rising inflation.

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1:24

‘Adverse effect’ of inflation to hurt public finances

“Keeping the public finances on a sustainable path is crucial so we can continue helping the British people when needed, without burdening future generations with high debt repayments.”

The ONS put the public debt at £2.32trn.

That equates to almost 95% of gross domestic product – up from about 82% immediately before the pandemic struck.

Bethany Beckett, an economist with Capital Economics, said borrowing was currently coming in below forecasts by the Office for Budget Responsibility (OBR) but would probably overtake them soon.

“We expect the combination of higher inflation and interest rates to keep pushing borrowing above the OBR’s forecast in the coming months,” she said.

“That will be unwelcome news for the chancellor.”