Key facts
- UK government net borrowing in May was £23.2bn, surpassing the £19bn prediction.
- Debt interest costs in May hit a record £11.7bn.
- Public sector debt as a share of GDP rose to 95.1%.
- Andy Burnham won the Makerfield by-election.
- Increased defence spending and potential energy support packages pose fiscal challenges.
UK government borrowing in May significantly exceeded economists' expectations, reaching £23.2bn against a predicted £19bn, official data from the Office for National Statistics revealed. This increase was partly driven by record-high debt interest costs of £11.7bn for the month, coinciding with gilt yields reaching nearly 30-year highs. Public sector debt as a share of GDP edged up to 95.1%.
The release of these figures occurred on the same day Andy Burnham secured a victory in the Makerfield by-election. Analysts have expressed concerns that a potential leadership bid by Burnham could usher in a period of looser fiscal policy, characterized by increased spending pledges and tax cuts. Richard Carter of Quilter Cheviot noted that the borrowing figures highlight the fiscal challenges Burnham would face if he were to pursue the country's leadership.
However, some economists, like Modupe Adegbembo from Jefferies, suggested that market reactions might be more influenced by geopolitical events in the Middle East and evolving interest rate expectations, with investors having already factored in the potential risks associated with a Burnham premiership.
Chancellor Rachel Reeves is navigating a complex fiscal landscape, facing pressure to fund increased defence spending and address the economic impacts of higher oil and gas prices. Defence Secretary Dan Jarvis attended a meeting with NATO allies where concerns were raised about the UK's commitment to increasing defence spending to 3.5% of GDP, a target that would require an additional £40bn annually. The government has committed to a smaller increase of £13bn over three years by cutting capital budgets.
Further pressure on public finances could arise from potential energy support packages and the lingering effects of inflation and reduced economic growth, even if a peace deal is signed, according to the Office for Budget Responsibility.