UK borrowing rises above forecast in May as debt costs mount

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UK borrowing rises in May

Highlights

UK government borrowing reached £23.3bn in May, exceeding the £17.7bn forecast and marking a 30 per cent annual increase.
Debt interest payments surged to a record £11.7bn in May due to higher gilt yields and inflation, intensifying fiscal pressure and limiting fiscal policy flexibility.
10-year gilt yield rose 0.05 percentage points to 4.8 per cent after the data release, while May retail sales beat expectations with a 1.2 per cent increase.

May deficit exceeds forecasts

As reported by the Office for National Statistics, UK government borrowing reaches £23.3bn in May, 30 per cent higher than in the same month a year earlier and above the £17.7bn forecast by the Office for Budget Responsibility.

Debt interest payments hit £11.7bn in May, the highest level on record for that month. Higher benefit payments and broader inflation pressure on public spending also contribute to the larger deficit.

Rob Wood, UK economist at Pantheon Macroeconomics, says the public finances have made a "terrible start" to the current fiscal year, which begins in April. He says two months of data do not establish a reliable trend, but adds that higher gilt yields and inflation than assumed in the fiscal forecast are likely to push debt interest payments higher, while a new prime minister would probably want to spend more as well.

Fiscal and market pressure intensifies

Following the figures, the yield on the 10-year gilt rises 0.05 percentage points to 4.8 per cent. May's deficit, the second-highest on record for the month, highlights the fragile state of the public finances after bond market turbulence and the energy crisis triggered by the Iran war.

Andy Burnham, who returns to parliament as a Labour MP after winning the Makerfield by-election on Friday, has signalled potentially costly spending commitments if he becomes prime minister, including easing the burden of student loans and increasing defence spending. Economists say the borrowing figures show how little room for manoeuvre he has as he tries to reassure bond investors that he would follow the government's fiscal rules.

Nabil Taleb, an economist at PwC, says the challenge is not only the level of monthly borrowing but also how quickly financing conditions genuinely ease. Responding to the data, Chief Secretary to the Treasury Lucy Rigby says the war in the Middle East has clearly affected economies around the world, while arguing the government has the right economic plan to protect families and businesses from rising costs and cut borrowing faster than any other G7 economy.

Separate figures released on Friday show retail sales rise 1.2 per cent in May, beating forecasts as discounts and warm weather attract shoppers.

We previously reported on the sharp deterioration in the UK’s public finances after May borrowing came in far above expectations, with the monthly budget deficit hitting £23.3bn and rising 30% year-on-year. Our earlier coverage also noted that a weaker growth outlook and higher borrowing costs were intensifying market funding pressure, underscored by the government having to issue longer-dated debt at the highest yield in decades.

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