UK interest rates: Rising interest rates hurt UK Public budgets

• Interest payments rose to £7.6bn in May, above the level for the same month last year.
• Rise was due to an increase in retail price inflation, to which many loans are tied.
• Chancellor Rishi Sunak said: “Rising inflation and increasing debt interest costs pose a challenge”.

UK interest rates: The predicted decline in public sector borrowing was thwarted last month by rising interest payments on government debt.

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Public sector net borrowing was £14 billion in May, a decrease of £4 billion from the same month last year, according to statistics released by the Office of National Statistics on Thursday. However, May’s borrowing was far greater than the £12bn predicted by Reuters-polled analysts and the £10.3bn predicted by the Office of Budget Responsibility.

Interest payments increased to £7.6bn in May, far above the level for the same month last year and over the OBR’s projection of £5.1bn, as a result of a sharp increase in retail price inflation, to which many loan payments are tied. Index-linked gilts account for twenty-five percent of UK government debt.

The elimination of the majority of Covid-19 government support programmes and stronger tax collections as a result of the strengthening labour market and reopening of the economy partially offset the rising interest payments.

Chancellor Rishi Sunak said: “Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.”

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He added that “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”.