Cost of living: Inflation fuels 63% hike in UK debt costs as borrowing outstrips forecasts

Over the past year, interest payments on government debt have risen by 63% due to rising inflation.


In July, the Office for National Statistics (ONS) reported the UK borrowed more than expected as public spending exceeded taxes and other income.


It is estimated that the government borrowed £4.9 billion in July, exceeding the forecast of £0.2 billion by the Office for Budget Responsibility, its own independent financial watchdog. The budget deficit for the year so far is £55 billion, significantly higher than the forecast of £2.8 billion by analysts.


Prior to COVID-19, which prompted a historic surge in government borrowing in July 2019, the public finances were in surplus by £0.9bn. As a result of increases in Retail Price Index (RPI) inflation, government debt costs rose to £5.8 billion in July, up £2.3 billion from last year.


Earlier this week, the ONS revealed that RPI surged to 12.3% in July, while the broader Consumer Price Index (CPI) inflation figure hit a new 40-year-high of 10.1%.

The latest data also showed government spending increased by £3.4bn to £76.5bn in July compared with the same month year.


Chancellor Nadhim Zahawi responded to the figures by saying: "I know rising inflation is challenging families and businesses, and it puts pressure on public finances by pushing up debt interest bills." Government support will continue to arrive in the coming weeks and months, targeted at those who need it the most, such as pensioners, people on low incomes, and people with disabilities.


" Michael Stelmach, senior economist at KPMG UK, said the latest figures would mean "tough choices" for the next chancellor following the Conservative leadership election. "We are taking a balanced approach: safeguarding the public finances while providing significant assistance to households."


There has been a clear shift in the balance of risks to public finances towards the downside. The cost-of-living crisis will likely require further support to households, while a slowing economy will reduce receipts, making fiscal targets even more difficult to achieve."


The frontrunner in the Conservative Party leadership race, Foreign Secretary Liz Truss, has said she will cut taxes, while her rival, former chancellor Rishi Sunak, has warned that will risk fuelling inflation and has proposed more direct, targeted support.


If Ms Truss wins, Pantheon Macroeconomics' chief UK economist Samuel Tombs estimates the current fiscal year's deficit will be approximately £170bn, about three times its size before the pandemic.


Consumer confidence has plunged to an all-time low amid soaring costs of living and bleak economic predictions, according to new research.


Inflation is likely to tip the UK into recession later this year, according to the Bank of England.