UK GOVERNMENT borrowing increased sharply in the first eight months of the fiscal year as the cost of helping people with the living standards crisis drove up government spending.

The deficit between April and November climbed to £116.4 billion (S$195.7 billion), a rise of 27 per cent from a year earlier, the Office for National Statistics (ONS) said on Thursday (Dec 21). November alone saw a shortfall of £14.3 billion, more than the £13 billion forecast by economists.

The increase in the year to date reflects spending to compensate Britons for the highest inflation in decades. Welfare costs rose 12 per cent from a year earlier after benefits were raised by 10 per cent in April, while public-sector staff costs also rose by 12 per cent, the ONS said.

“In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments,” the ONS said.

These increases were partly offset by a 15 per cent reduction in debt-interest payments, reflecting a drop in the rate of inflation used to determine payments on index-linked bonds. Last month alone, however, debt costs hit £7.7 billion, the highest November total since records began in 1997.

Despite the upward pressure on spending, the Office for Budget Responsibility expects borrowing for 2023/24 as a whole to come in at £124 billion, slightly below the £130.5 billion recorded a year earlier. The improvement reflects the fact that the government spent tens of billions last winter to subsidise the spiralling cost of energy.

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Laura Trott, chief secretary to the Treasury, said: “It was right to spend billions protecting people during the pandemic and the energy shock triggered by Putin’s invasion of Ukraine, but we cannot leave our children and grandchildren to pick up the tab. That’s why the Prime Minister has made reducing debt a top priority.”

The government gathered £26.3 billion more in tax over the eight months than last year, a 4.5 per cent increase as high inflation lifted VAT revenue by 8 per cent and income tax by 9.6 per cent. Corporation tax receipts were up 10.4 per cent, reflecting the increase in the rate from 19 per cent to 25 per cent from April. Spending including net investment rose by £70.8 billion, an increase of 10 per cent.

The government is under pressure to cut taxes as the tax burden is on course to reach a post World War II high, largely driven by the frozen income-tax thresholds that are dragging millions of Britons into higher bands.

Government debt at 97.5 per cent of GDP is close to the size of the economy and at its highest level since the 1960s, the ONS said. The OBR reckons Chancellor Jeremy Hunt has £13 billion of headroom against his fiscal rules, which require debt excluding Bank of England liabilities to be falling as a share of GDP in the fifth year of the forecast.

That opens the prospect that Hunt will announce further tax cuts in the spring budget to boost the fortunes of his Conservative Party before an election on track to be held next year.

The chancellor may find he has even more room for manoeuvre, thanks to inflation falling faster than forecast and a drop in market interest-rate expectations over the past few weeks. The developments could save the Treasury billions of pounds in debt costs.

“Due to lagged index-linked gilts, the fiscal benefits of this fall in inflation rates will be reflected in borrowing figures early next year,” said Divya Sridhar, economist at PwC UK. BLOOMBERG