New figures released by the Office for National Statistics (ONS) on Friday have revealed that government borrowing in May was lower than initially expected. According to the ONS, the difference between public sector spending and income, known as net borrowing, was £15 billion. This is an increase of £0.8 billion from the same time last year.
Although the amount is below the forecast of £15.7 billion by the Office for Budget Responsibility (OBR) and less than expected by economists, it is still the highest amount for the month of May since the beginning of the COVID-19 pandemic.
The ONS also reported that public sector net debt, excluding public sector banks, was provisionally estimated at 99.8% of gross domestic product (GDP) in May – the highest level since March 1961. This figure is also 3.7 percentage points higher than the same period last year.
Economists have stated that these figures indicate that the next chancellor, whoever wins the upcoming general election, will face a series of potential financial challenges. Alex Kerr from research firm Capital Economics noted that while the better-than-expected net borrowing figure may provide some room for the next chancellor, it will not significantly reduce the “scale of the fiscal challenge” that lies ahead. This includes the possibility of higher interest rates leading to an increase in the government’s debt interest bill.
Kerr estimates that the next chancellor will have a financial “headroom” of around £8.5 billion at their first post-election fiscal event, which is slightly less than the £8.9 billion left over from the last budget in March.
In other business news, popular social media app TikTok has warned of a potential ban in the US if a ruling on free speech is not made. Meanwhile, the Bank of England has held interest rates for the seventh consecutive time, and Sainsbury’s has sold its banking arm to NatWest.
Economist Michal Stelmach from KPMG UK stated that the next chancellor will face a “fiscal Pandora’s box” regardless of which party wins the general election. He added that interest rates are expected to remain high, making it difficult to reduce debt, and spending pressures will continue to mount. Stelmach also noted that while there may be subtle differences in the stated plans for fiscal rules and taxation, borrowing is likely to follow a similar path under either government. However, a decisive victory in the election would give the winning party a stronger mandate to implement significant reforms or increase public investment.
