- author, Tom Espiner
- Role, BBC News correspondent
Government borrowing in May reached its highest levels since the Covid crisis, but was lower than the UK’s financial watchdog had expected.
Borrowing reached £15bn last month, £800m more than in May last year.
This means that the public sector spent more than it received in taxes and other revenues, prompting the government to borrow billions of pounds.
That is the third-highest number for May since records began in 1993, surpassed only by the pandemic years.
However, borrowing was £600 million less than the Office for Budget Responsibility (OBR) had forecast.
With the general election quickly approaching, economists have warned that whichever party wins will face similar challenges over taxes, spending and debt.
“Government borrowing remains steady, but Pandora’s box awaits the next chancellor,” said Michel Stelmach, chief economist at KPMG in the UK.
“Interest rates are set to remain high, debt will be difficult to reduce, and spending pressures will continue to escalate.”
While there were some bright spots in May’s borrowing numbers, according to Simon Wales, chief European economist at HSBC, he noted that government debt was at an “exceptional” level – the highest since the 1960s.
Government debt as a percentage of the UK’s economic output – known as GDP – reached 99.8% last month.
“What has happened is that public sector debt has increased, first during the global financial crisis and then again during Covid, so they are at historically high levels,” Wells told BBC Radio 4’s Today programme.
High debt levels mean that public sector finances are vulnerable to rising interest rates, making repayment more expensive. Wells warned that large debts leave less room to deal with any future crisis.
The Bank of England has been raising interest rates in an attempt to reduce inflation in the UK, but one effect of this is that the government has to pay more interest on debt.
Last month, interest on central government debt reached £8bn, one of the highest amounts ever recorded.
Taxes are a key battleground in the next general election, with the Conservatives, Labor and Liberal Democrats ruling out increasing income tax, VAT and National Insurance rates.
Cuts to National Insurance have eroded the amount of money the government receives at a time when politicians are unwilling to commit to spending more on public services.
The government received £900 million less from National Insurance in May than it received in the same month last year.
But overall, tax revenues rose by £1 billion after increased revenues from income, corporation and value added taxes.
Taxes, including income tax, actually rose after the government froze thresholds – the amount of money people earn before they start paying taxes or before they start paying a higher rate.
The thresholds usually rise in line with inflation, but in 2021 the Conservative government froze most of the ranges in response to Covid.
This has led to more people paying higher interest rates, a phenomenon known as “cash drag.”
Retail sales rebound
Meanwhile, in separate figures on Friday, retail sales rebounded in May after heavy rains dampened April activity.
The amount people bought – volumes – rose 2.9% in May, after a 1.8% decline in April following bad weather. The value also increased by 3.2%.
Danny Hewson, head of financial analysis at AJ Bell, said: “It’s no surprise that we Brits are obsessed with the weather.”
“A little sunshine in May, which helped lift temperatures and sentiment, led to an increase in sales, especially for clothing and furniture retailers,” she said.
Jackie Baker, head of retail at auditors RSM UK, said consumers had “stockpiled clothes in anticipation of their summer holiday and rumors of a UK heatwave” in May.
But she added that “confidence in spending on expensive goods remains low.”