Interest on Government debt hits February record ahead of spring statement

The Chancellor was dealt a blow ahead of Wednesday’s spring statement as official figures showed higher-than-expected Government borrowing last month after soaring inflation saw interest payments hit record levels.

The Office for National Statistics (ONS) said interest payments on Government debt jumped to £8.2 billion last month, up from £5.4 billion a year earlier and the highest for any February on record.

It came as UK inflation jumped to 30-year highs due to rocketing energy and fuel prices and as a result of supply chain problems.

The Office for Budget Responsibility (OBR) is set to reveal its latest predictions for inflation alongside the Chancellor’s spring statement on Wednesday, with suggestions it could hit double digits later this year as the impact of the Ukraine conflict takes hold in the UK economy.

The ONS said the jump in UK debt interest payments is down to the recent surge in the Retail Prices Index (RPI) measure of inflation, which determines payouts on index-linked gilts.

RPI rose to its highest level since March 1991, hitting 7.8% in January, up from 7.5% in December. Inflation for February is revealed on Wednesday.

The ONS data showed that the rising interest payments came despite borrowing falling year on year to £13.1 billion in February, down by £2.4 billion from the same month a year earlier.

But the February borrowing figure was far more than the £8.3 billion expected by most economists and the £8.1 billion predicted by the OBR as higher tax receipts were offset by the jump in interest payments.

Public sector borrowing in the financial year to February was £138.4 billion, the third highest since records began in 1993, though it was less than half of the £290.9 billion borrowed in 2020-21 at the height of the pandemic.

The year-to-date figure still puts the Chancellor on track to undershoot the OBR’s £183 billion 2021-22 borrowing forecast, according to experts.

The data also showed that public sector debt, excluding public sector banks, remained at a level not seen since the early 1960s – at £2.3 trillion at the end of February, or around 94.7% of gross domestic product (GDP).

The Chancellor said: “The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances.

“With inflation and interest rates still on the rise, it’s crucial that we don’t allow debt to spiral and burden future generations with further debt.”

Investec economist Sandra Horsfield said some helpful revisions in the ONS back data “leaves a fiscal-year deficit for 2021-22 of £150 billion or perhaps even less entirely within play, far below the £183 billion the OBR had pencilled in at the time of the Budget.

“Such a material undershoot will add to room for manoeuvre for Mr Sunak to help buffer some of the cost-of-living crisis at tomorrow’s spring statement.”

But she added the UK’s public finances face “increased headwinds”, with the one-off £150 council tax rebate to help households with rising energy bills set to increase April’s borrowing figures and interest payments expected to continue rising as inflation races higher.