Government Borrowing Hits £15bn in May, Challenges Await the Next Chancellor

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Government Borrowing Hits £15bn in May, Challenges Await the Next Chancellor

In May, the UK government borrowed £15bn, marking the highest level since the Covid-19 crisis began, although it fell short of the Office for Budget Responsibility’s forecast. While this figure was £800m higher than in May of the previous year, it was £600m less than what the OBR had anticipated.

Looking ahead to the upcoming general election, the winning party will face significant hurdles related to tax, spending, and debt management. Michal Stelmach, a senior economist at KPMG UK, cautioned that although government borrowing has stabilized somewhat, challenges lie ahead for the next chancellor due to mounting debt, higher interest rates, and ongoing spending pressures. Simon Wells, the chief European economist at HSBC, pointed out that while there were some positive aspects in May’s borrowing figures, the overall government debt remains exceptionally high, reaching levels not seen since the 1960s, standing at 99.8% of the UK's GDP in the previous month.

Speaking on BBC Radio 4’s Today programme, Wells explained the significance of the substantial debt levels, highlighting that they make public finances vulnerable to higher interest rates, ultimately leading to increased repayment costs and reduced flexibility in managing future crises. The Bank of England's actions to raise interest rates to combat UK inflation have contributed to higher interest payments on government debt, with interest payable on central government debt hitting £8bn in May, one of the highest amounts on record. Despite the challenges posed by high debt levels, all major political parties, including the Conservatives, Labour, and Liberal Democrats, have pledged not to increase income tax, VAT, and National Insurance rates in the lead-up to the general election. This vow comes amidst reductions in National Insurance contributions which have weakened government revenue, despite an overall increase in tax receipts by £1bn in May driven by higher revenues from income, corporation, and value-added taxes. The freeze on tax thresholds implemented in response to Covid in 2021 has effectively increased tax rates by pulling more individuals into higher tax bands through "fiscal drag."

On a different note, retail sales in May bounced back following a slump in April attributed to adverse weather conditions. Sales volumes surged by 2.9% in May after a 1.8% drop in April, while sales values increased by 3.2%. Danni Hewson, head of financial analysis at AJ Bell, linked this upturn in sales to improved weather conditions in May, especially boosting sales for clothing and furniture retailers. Jacqui Baker, head of retail at auditors RSM UK, highlighted that consumer spending on clothing saw an increase in anticipation of summer holidays and amid speculation about a UK heatwave, although consumer confidence to splurge on big-ticket items remains subdued.