British government debt rose to the highest level in almost 60 years last month and retail sales slumped, underscoring the scale of the economic challenges facing whoever replaces Prime Minister Liz Truss after her administration imploded under the weight of its failed financial plan.
Public borrowing rose to 98 per cent of economic output in September as rampant inflation increased interest payments on what the government owed, the Office for National Statistics said Friday. That’s higher than at any point since 1963, when Britain was still paying off debts accumulated during World War II.
Deepening the sense of gloom were figures showing that retail sales fell for a second straight month and are now 1.3 per cent below pre-pandemic levels.
“Today’s weaker-than-expected public borrowing figures … are a reminder that amidst the current political turmoil, the tough task facing the government of demonstrating its fiscal credibility lie immediately ahead, rather than behind,” said James Smith, research director at the Resolution Foundation, a think tank focused on improving living standards for low- and middle-income people.
Britain has begun the process of picking its third prime minister in less than four months after Truss was forced to resign Thursday following weeks of turmoil sparked by her economic plans.
The new leader’s first task will be to restore credibility after Truss’ decision to announce 45 billion pounds (US$50 billion) of tax cuts without saying how she would pay for them fuelled concerns about spiralling government debt that unnerved investors and voters and forced emergency intervention by the Bank of England.
Treasury chief Jeremy Hunt, who took office last week, has reversed most of Truss’ program and pledged that debt will begin falling as a percentage of gross domestic product within the next few years. That has steadied financial markets after Truss’ plans sent the pound plunging to record lows, threatened the solvency of some pension funds and pushed borrowing costs higher for the government and millions of homeowners.
But people are watching closely to see how Hunt and his new boss — whoever it may be — achieve those goals at a time when the demands on government are rising.
The government has already promised to spend 60 billion pounds to shield homes and businesses from high energy prices, and demands are growing to boost welfare benefits and public pensions with inflation running at a 40-year high of 10.1 per cent. The National Health Service, schools and public transportation providers also are seeking more money to cover soaring costs.
Rising prices are squeezing consumers, with sales of food, motor fuels, furniture and other non-food items all falling in September, the Office for National Statistics said. The overall decline was driven by a 1.8 per cent drop in grocery store sales.
“In recent months, supermarkets have highlighted that they are seeing a decline in volumes sold because of increased food prices and cost of living impacts,” the ONS reported.
The rising cost of living also is squeezing government finances by increasing the cost of servicing the nation’s debts.
Interest payable on the government’s debt rose to 7.7 billion pounds in September, or about 2.5 billion pounds more than during the same month last year, the ONS said. That was due primarily to rising payments on inflation-linked bonds, which are pegged to the retail prices index.
Retail price inflation accelerated to 12.6 per cent in September from 4.9 per cent a year earlier, ONS figures show. The retail prices index tends to be higher than the consumer prices index because of differences in the way the two numbers are calculated.
All of this comes against the backdrop of Russia’s invasion of Ukraine, which has driven up prices for food and energy and fueled demands for an increase in defense spending.
Government borrowing increased to 20 billion pounds in September, 2.2 billion pounds more than in September 2021 and 5.2 billion pounds more than forecast in March by the independent Office for Budget Responsibility, the ONS said.
Hunt said this week that the government would have to raise taxes and reduce spending to restore faith in the public finances, but he refused to say what programs would be affected until he delivers his new economic plan to Parliament on Oct. 31. The plan will be accompanied by analysis from the Office for Budget Responsibility showing how it is likely to affect public borrowing.
“That means decisions of eye-watering difficulty,” Hunt told the House of Commons after taking over. “But I give the House and the public this assurance: every single one of those decisions, whether reductions in spending or increases in tax, will prioritize the needs of the most vulnerable.”