The UK paid a record £6 billion in debt interest last month as the public finances pay the price of higher inflation in the wake of the Brexit vote, shock official figures revealed on Tuesday.
The borrowing bill, the highest ever for the month, fuelled an unexpected rise in October’s deficit to £8 billion, cramping Chancellor Philip Hammond’s room for manoeuvre in tomorrow’s Budget.
Almost a quarter of the UK’s £1.8 trillion debt pile, nearly £400 billion, is in so-called index-linked bonds linked to the Retail Prices Index, which has soared since the Brexit vote hit the pound.
The Office for National Statistics figures showed the UK paying 25%, or £1.2 billion, more in interest than October last year.
In the financial year to date the UK has paid out £35.4 billion in debt interest, some £4.8 billion more than the same period in 2016.
Hammond is still likely to comfortably beat the Office for Budget Responsibility’s £58.3 billion borrowing bill but by far less than originally thought. The tax take is expected to deteriorate towards the end of the financial year, because of receipts paid early to avoid a tax on dividends introduced in April last year, while weaker growth also feeds into lower tax receipts.
The EY ITEM Club’s Howard Archer said: “the actual undershoot may well be limited over the latter months by a lacklustre economy limiting tax receipts and by higher interest debt payments.”
Hammond is attempting to cut the deficit to 2% of GDP by 2021.
Capital Economics’ Paul Hollingsworth added: “We expect tomorrow’s Budget to be generally cautious, incorporating a broadly neutral package of tax and spending changes.”