The UK's National Debt has exceeded £3 trillion for the first time, according to official figures released as Chancellor John Healey prepares his Budget statement next week. The headline rate of inflation has reached 3.5% and appears set to rise further to 4% in coming months, while borrowing is outpacing forecasts as spending and interest costs increase. These figures define the difficult balance Healey faces between providing relief to consumers struggling with cost of living pressures and maintaining public finances under control.
The inflation rise was partly driven by surges in petrol and diesel prices, but troubling signs of stickier price pressures are emerging elsewhere in the economy. From airfares to computer game downloads, underlying inflation measures have also increased, suggesting that higher price rises may not be temporary. Capital Economics now expects the main inflation measure to peak at 4.2% next year. The Bank of England, which carefully monitors services inflation and core inflation, is significantly more likely to raise interest rates next month based on these figures.
The inflation data carries direct consequences for government spending. By law, welfare payments including personal independence payment and carer's allowance must rise in line with September's consumer price index measure of inflation. The State Pension is confirmed to increase by 3.9% next April under the Triple Lock arrangement. However, there is some relief: food price inflation remains largely unaffected by the energy shock driving overall price increases.
Higher inflation during a period of frozen tax thresholds will generate additional tax revenue in cash terms, but will also push up the cost of public services and likely trigger union pay demands. UK borrowing costs have risen alongside other advanced economies as international tensions have intensified. The International Monetary Fund has praised pencilled-in plans to shrink borrowing, and the borrowing costs gap with other G7 nations has narrowed slightly, providing some support for the chancellor's position. Yet the latest economic data underscores the difficulty of actually delivering on those plans.
For savers and borrowers in the UK, rising inflation combined with higher interest rates means savings returns may struggle to keep pace with price increases while borrowing costs will become more expensive.