Government borrowing rose in May to £15bn, the highest level since the Covid-19 pandemic, but still below expectations from the Office for Budget Responsibility (OBR). This figure was £800 million higher than in May last year, but £600 million lower than the Office for Budget Responsibility had predicted.
As the general election approaches, the winning party will face major challenges related to taxes, spending, and debt. “Government borrowing remains steady, but a financial Pandora’s box awaits the next chancellor,” warned Michal Stelmach, chief economist at KPMG in the UK. “Interest rates are set to remain higher, debt will be difficult to reduce, and spending pressures will continue to escalate.”
Simon Wells, chief European economist at HSBC, noted some positive aspects in May’s borrowing figures, but stressed that government debt remains unusually high, reaching levels not seen since the 1960s. Last month, government debt reached 99.8% of the UK’s GDP.
“Public sector debt has risen, first during the global financial crisis and then again during Covid, so they are at historically high levels,” Wells explained on BBC Radio 4’s Today programme. High debt levels make public finances vulnerable to rising interest rates, which increases repayment costs. Wells stressed that large debts reduce flexibility in managing future crises.
The Bank of England has raised interest rates to reduce inflation in the UK, but this is also causing interest payments on government debt to rise. In May, interest on central government debt reached £8 billion, one of the highest amounts ever recorded.
Taxes are a central issue in the upcoming general election, with the Conservatives, Labor and Liberal Democrats pledged not to increase rates of income tax, VAT and National Insurance. Reductions in National Insurance contributions have reduced government revenues, which is a problem at a time when there is a reluctance to increase public spending. In May, the Government received £900 million less from National Insurance than in the same month last year.
However, total tax revenues rose by £1 billion due to higher revenues from income, corporation and value-added taxes. The government’s freeze on tax thresholds, implemented in response to Covid in 2021, effectively increased tax rates by drawing more people into higher tax bands through ‘fiscal drag’.
Retail sales rebound in May
In separate figures, retail sales rebounded in May after falling in April due to bad weather. Sales volumes rose by 2.9% in May, after a 1.8% decline in April, and sales values rose by 3.2%.
Danny Hewson, head of financial analysis at AJ Bell, commented on Britain’s obsession with the weather, saying: “A little sunshine in May has lifted temperatures and sentiment, leading to increased sales, especially for clothing and furniture retailers.”
Jackie Baker, head of retail at audit firm RSM UK, noted that consumers have stocked up on clothes in anticipation of the summer holidays and rumors of a heatwave in the UK. But she added that “confidence in spending on big-ticket items remains low.”