Surging UK inflation erodes Sunak's room for budget manoeuvres

LONDON: Britain's government looks firmly on track to borrow less this tax year than forecast only two months ago but surging inflation will soon curb any leeway for finance minister Rishi Sunak ahead of his March budget update, data showed on Tuesday.

Public sector net borrowing, excluding state banks, totalled 16.848 billion pounds ($22.71 billion) in December, the ONS said, less than the average forecast of 18.5 billion pounds in a Reuters poll of economists.

In the 2021/22 financial year so far, spanning April through December, Britain has borrowed 146.8 billion pounds, some 129.3 billion pounds less than at the same point in the 2020/21 financial year when the COVID-19 crisis was at its most intense.

Borrowing for the 2021/22 financial year so far, spanning April through December, is now running almost 13 billion pounds less than the Office for Budget Responsibility had forecast for this point, at 146.8 billion pounds.

This included a 6 billion-pound downward revision to borrowing up until November, the ONS said.

Sterling holds close to 23-month high versus euro

But the data also pointed to a rising cost to the public finances from inflation, which last month hit a 30-year high.

Debt interest payments hit 8.1 billion pounds last month - the second highest on record and reflecting a sharp jump in retail price inflation, the peg for inflation-linked British government bonds which account for about a third of the total.

"Surging inflation is making (Sunak's) task of returning the public finances to a sustainable footing much more difficult," Samuel Tombs, an economist with Pantheon Macroeconomics, said.

In response to the figures, Sunak said it was important not to burden future generations with high debt repayments.

Sunak is under pressure, including from some lawmakers in his own Conservative Party, to drop a planned increase in social security contributions for workers and employers which is due to start in April.

He is also considering ways to help soften the impact on households from surging energy costs.

The opposition Labour Party pointed to mismanagement of government spending during the pandemic.

The data showed a strong recovery in tax receipts.

Corporate tax revenues hit a all-time high of 5.5 billion pounds in December, the ONS said - with the caveats that it reflected large companies paying tax bills on a quarterly basis, and that the record is in current prices.