Thu. Jul 18th, 2024

Government Borrowing in May Hits Highest Level Since Covid Crisis

Government borrowing in the UK reached £15 billion in May, the highest level since the Covid crisis but still lower than the forecast by the Office for Budget Responsibility (OBR). This figure was £800 million higher than in May last year and the third highest for May since records began in 1993, surpassed only by the pandemic years.

How Government Borrowing Works

Government borrowing occurs when the public sector spends more than it receives in taxes and other income. To cover the shortfall, the government borrows money, leading to an increase in national debt. The government raises and spends approximately £1 trillion a year, and borrowing plays a crucial role in bridging any gaps between revenue and expenditure.

Lower Than Expected Borrowing

Despite the high borrowing figure, it was £600 million less than the OBR had anticipated. This difference suggests that while the borrowing levels are significant, they are not as dire as some forecasts had predicted.

Economic and Political Implications

With a general election approaching, the next government will face challenges related to tax, spending, and debt. Economists warn that the fiscal landscape will remain complex. Michal Stelmach, senior economist at KPMG UK, stated, “Government borrowing holds steady but the fiscal Pandora’s box awaits for the next chancellor.” He emphasized that high interest rates, mounting debt, and spending pressures will complicate efforts to reduce the deficit.

Simon Wells, chief European economist at HSBC, highlighted the extraordinary level of government debt, which is the highest since the 1960s. Public sector debt as a percentage of gross domestic product (GDP) was 99.8% in May. This high level of debt makes public finances vulnerable to higher interest rates, which increase the cost of repayments and reduce the capacity to manage future crises.

Interest Rates and Debt

The Bank of England has been raising interest rates to curb inflation, but this has also increased the cost of government debt. In May, the interest payable on central government debt reached £8 billion, one of the highest amounts on record.

Tax and Election Dynamics

Tax policies are a major focus in the upcoming general election, with the Conservatives, Labour, and Liberal Democrats all ruling out increases in income tax, VAT, and National Insurance rates. However, cuts in National Insurance have reduced government revenue, with £900 million less received in May compared to the previous year.

Despite this, overall tax receipts rose by £1 billion due to increases in income, corporation, and value-added taxes. A government freeze on tax thresholds since 2021 has led to “fiscal drag,” where more people are pulled into higher tax rates, effectively increasing tax revenue without raising rates.

Retail Sales Rebound

In separate economic news, retail sales rebounded in May after a decline in April caused by poor weather. Sales volumes rose by 2.9%, and the value of sales increased by 3.2%. Danni Hewson, head of financial analysis at AJ Bell, noted the impact of improved weather on consumer spending, particularly in clothing and furniture.

Jacqui Baker, head of retail at RSM UK, observed that consumers were preparing for summer holidays and a potential heatwave by stocking up on clothing. However, she also noted that confidence in spending on big-ticket items remains low.


May’s borrowing figures reflect a complex economic situation, with high debt levels and borrowing costs posing significant challenges. As the general election approaches, the fiscal policies of the next government will be crucial in addressing these issues. Meanwhile, the retail sector shows signs of resilience, buoyed by seasonal spending despite underlying economic uncertainties.

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