U.K. Budget Deficit Exceeds Forecasts as Debt Costs Triple By

(Bloomberg) — The cost of servicing U.K. government debt more than tripled in October from a year earlier due to surging inflation, leaving the budget deficit higher than economists forecast.

Interest costs were 5.6 billion pounds ($7.6 billion) compared with 1.8 billion pounds in the same month in 2020, the Office for National Statistics said Friday. In the first seven months of the fiscal year, the costs were up 63%.

The surge is due to a spike in inflation as a quarter of the national debt is linked to retail prices. The RPI rose to 6% in October, the highest since 1991, casting doubt on the Office for Budget Responsibility’s 5.2% forecast for the fourth quarter as a whole. Faster inflation may also prompt more Bank of England interest-rate increases, which markets expect to begin next month, further increasing debt-servicing costs.

The deficit in October alone stood at 18.8 billion pounds, little changed from a year earlier and higher than the 14 billion-pound figure that economists expected. The budget deficit totaled 127.3 billion pounds between April and October, the ONS said. 

The surge in debt costs highlights the risks facing Chancellor of the Exchequer Rishi Sunak as he tried to rein in the budget deficit. 

At last month’s budget, a brighter economic outlook allowed the OBR to slash its deficit forecast for the year as a whole to 183 billion pounds. However, the pace of improvement is forecast to slow, and Sunak is forecast to meet his pledge to end borrowing for day-to-day spending by mid-decade by the narrowest of margins.

Borrowing remained elevated last month despite the ending of two key pandemic-era support programs. The furlough plan and separate support for self-employed workers hit by the pandemic cost the taxpayer almost 100 billion pounds in total.

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