The UK government borrowed a substantial £23.3 billion in May, according to new figures from the Office for National Statistics (ONS). This represents an increase of almost a third compared to the same month last year and significantly outstripped the £5.6 billion forecast by the independent fiscal watchdog, the Office for Budget Responsibility (OBR).
A primary driver of this surge in borrowing was the record £11.7 billion paid out in interest on government debt during May. This marks the highest figure ever recorded for that month and reflects the ongoing impact of elevated inflation on the cost of servicing the national debt. ONS statistician Tom Davies noted that increased spending on debt interest, public services, investment, and benefits all contributed to the higher borrowing, outweighing any gains from increased tax receipts.
Economists are now highlighting the precarious state of the UK's public finances. Ruth Gregory, deputy chief UK economist at Capital Economics, described the situation as 'fragile,' suggesting that any future Prime Minister would face significant constraints on spending. This fragility is partly attributed to the unforeseen economic repercussions of the conflict in the Middle East, which were not fully factored into the OBR's March forecasts and have contributed to a jump in inflation and oil prices.
The current economic climate presents a challenging backdrop for UK households and businesses. Higher government borrowing costs can indirectly impact the wider economy, potentially influencing future interest rate decisions by the Bank of England. The Bank recently opted to maintain interest rates, attempting to balance a subdued jobs market with expectations of further inflation rises in the coming months. This decision means mortgage holders will see no immediate change to their variable rates, though fixed-rate deals remain influenced by long-term borrowing costs.
For investors, the perceived stability of public finances is a key consideration. Susannah Streeter, chief investment strategist at Wealth Club, noted that investors appear to have already factored in the likelihood of a Labour leadership contest. Andy Burnham, who recently became MP for Makerfield, has pledged to adhere to existing fiscal rules, including not borrowing for day-to-day spending, a stance that may be offering some reassurance to markets. The FTSE 100, while influenced by broader global economic sentiment, will also be sensitive to domestic fiscal policy direction.
Both the government and the opposition have reacted to the figures. Chief Secretary to the Treasury Lucy Rigby acknowledged the global impact of the Middle East conflict but asserted the government's economic plan is designed to protect families and businesses and cut borrowing. Shadow Chancellor Mel Stride, however, stated that 'borrowing is out of control,' advocating for spending controls, particularly on welfare, to balance the books. Separately, retail spending saw a 1.2% rise in May, boosted by favourable weather conditions and promotional activity.