Britain’s inflation bill eats away at Sunak’s fiscal room for maneuver | Investment News

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By William Schomberg and Andy Bruce

LONDON (Reuters) – Rapidly rising inflation is pushing up Britain’s government debt interest bill sharply and limiting Finance Minister Rishi Sunak’s options to ease a cost-of-living squeeze in an announcement by taxes and expenses next month.

Data released on Tuesday showed a lower-than-normal budget surplus in January, a month when income tax receipts are pouring in, and economists said the continued acceleration in inflation will limit the room for maneuver Sunak has for his budget.

Excluding state banks, the surplus stood at 2.9 billion pounds ($3.9 billion) last month, below an average forecast of 3.5 billion in a Reuters poll of investors. economists.

It was the first time the monthly budget figures had not gone into the red since the pandemic hit two years ago.

But the surplus was smaller than usual for the start of the year. In January 2020, it was almost £10 billion.

Inflation, which is at its highest level in 30 years and is expected to reach 7% in April, took the government’s interest bill to 6.1 billion pounds in January, up 4.5 billion from the same month last year, mainly due to inflation. obligations.

In the first 10 months of the 2021/22 financial year ending March 31, interest payments jumped 80% to nearly £60bn, outpacing Britain’s entire budget deficit in the year before the arrival of COVID-19.

The jump in inflation, caused by soaring energy prices and the aftermath of the pandemic on the global economy, is also weighing on British household finances.

Sunak has already announced measures to soften the blow of April’s 54% rise in energy tariffs, but he is under pressure to do more in a budget statement expected on March 23, shortly before the dues hike. social.

A think tank, the National Institute for Economic and Social Research, estimates that higher payroll taxes, combined with higher inflation, could lead to a 30% increase in misery in Britain.

Tuesday’s data showed Sunak had some leeway.

Tax revenue was £29billion higher than the official forecast in the first 10 months of the 2021/22 financial year, while spending, on inflation-linked bonds plus utilities and rail grants, fell. increased by 9 billion pounds.

Cumulative borrowing between April last year and January was about half its level in the same period of 2020/21, when the pandemic crisis was at its peak.

But Sunak stressed the need to prepare for the risks ahead.

“Our debt has increased significantly and there are new pressures on public finances, in particular due to rising inflation,” he said.

“Keeping public finances on a sustainable path is crucial so that we can continue to help the British people in times of need, without burdening future generations with high debt repayments.”

Britain’s fiscal watchdog, the Office for Budget Responsibility, said “big upside spending surprises (on debt interest costs) relative to our October forecast will follow in the months to to come”.

Britain’s outstanding public debt stands at £2.32 trillion and has reached almost 95% of gross domestic product, up from around 82% immediately before the pandemic hit Europe.

Bethany Beckett, an economist at Capital Economics, said public finances were likely to end the financial year in better shape than the official forecast that underpins Sunak’s budget, but next year’s deficit is expected to top £30bn.

The Bank of England is expected to raise interest rates for a third straight meeting next month as it tries to keep rising inflation from taking hold.

Michal Stelmach, economist at KPMG UK, said fiscal performance in early 2022 was likely better than Tuesday’s data suggested, as around 20% of taxpayers took advantage of a one-month extension to file their returns. of income.

(Reporting by William Schomberg and Andy Bruce; Editing by Alex Richardson, Clarence Fernandez and Tomasz Janowski)

Copyright 2022 Thomson Reuters.

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