Image source, Getty Images
- Author, Tom Espiner
- Role, Reporter, BBC News
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Government borrowing reached the highest level since the Covid crisis in May, but was lower than the British budget watchdog had predicted.
£15bn of loans were taken out last month, which was £800m higher than in May last year.
It means the public sector has spent more than it has received in taxes and other revenues, forcing the government to borrow billions of pounds.
It is the third highest figure for May since records began in 1993, surpassed only by the pandemic years.
However, the loans were £600m less than the Office for Budget Responsibility (OBR) had expected.
With the general election fast approaching, whichever party wins will face similar challenges on taxes, spending and debt, economists warn.
“Government borrowing remains stable, but Pandora’s fiscal box awaits the next chancellor,” said Michal Stelmach, senior economist at KPMG UK.
“Interest rates are expected to remain higher, debt will become more difficult to reduce and spending pressures will continue to increase.”
While there were some bright spots in May’s credit figures, Simon Wells, chief European economist at HSBC, pointed out that government debt was at “extraordinary” levels – and the highest since the 1960s.
Public debt as a percentage of British economic output – known as gross domestic product – stood at 99.8% last month.
“What has happened is that public sector debt has risen, first through the global financial crisis and then again through Covid, and so it is at an all-time high,” Wells told BBC’s Today program Radio 4.
High debt levels mean that public sector finances are vulnerable to higher interest rates, making repayments more expensive. Mr Wells warned that large debts leave less room to deal with a future crisis.
The Bank of England had raised interest rates in an attempt to reduce British inflation, but a knock-on effect of this is that the government has to pay more interest on debt.
Last month, interest on the national debt reached £8 billion, one of the highest levels ever recorded.
Taxes are a key battleground in the upcoming general election, with the Conservatives, Labor and Liberal Democrats all ruling out an increase in income tax, VAT and national insurance rates.
Cuts to national insurance have eaten into the amount of money the government receives at a time when politicians are unwilling to commit to spending more on public services.
The government received £900 million less from National Insurance in May than in the same month last year.
But overall, tax revenue rose by £1 billion, after income tax, corporation tax and VAT revenues rose.
Taxes, including income taxes, have actually risen following a government freeze on thresholds: the amount of money people earn before they start paying taxes or before they start paying a higher rate.
Thresholds usually rise in line with inflation, but in 2021 the Conservative government froze most bands in response to Covid.
This has pushed more people to pay higher rates, a phenomenon known as “fiscal drag.”
Retail sales are recovering
Meanwhile, retail sales recovered in May, as shown in separate figures on Friday, after heavy rain dampened activity in April.
The amount people bought – volumes – rose 2.9% in May, after a 1.8% drop in April due to bad weather. The value also rose, by 3.2%.
Danni Hewson, head of financial analysis at AJ Bell, said it was “no wonder we Brits are obsessed with the weather”.
“A little sunshine in the month of May, which helped raise temperatures and mood, translated into an increase in sales, especially for clothing and furniture retailers,” she said.
Jacqui Baker, head of retail at auditors RSM UK, said consumers had been “stocking up on clothes in May in anticipation of their summer holidays and rumors of a UK heatwave”.
But she added that “confidence to spend money on expensive items remains low.”