KPMG comments on today’s public sector finances data
Despite an improvement in borrowing, rising interest rates could turn fiscal targets into an elusive dream says Michal Stelmach, senior economist at KPMG UK:
“Government borrowing fell to £17.4bn in November, down by £4.9bn on a year ago. This reflected a continuation of economic recovery from the pandemic, with VAT receipts up by 16%, PAYE income tax up by 13%, and non-interest spending down by 8% on a fiscal year-to-date basis.
“However, inflation continued to dictate debt interest spending, with payments recording £4.5bn. We project debt interest payments to total £64bn in 2021-22, up from £39bn in 2020-21.
“Unlike during previous recoveries, monetary policy will have large fiscal implications as the Bank prepares to withdraw its stimulus. Around a half of total public debt is linked to either inflation or the Bank of England’s interest rate via QE, both of which will put further upward pressure on servicing costs next year. Taken together, with three further rate hikes that we expect by the end of 2022-23, they could add as much as £11bn to borrowing that year, eating up over a half of the Chancellor’s current fiscal headroom.”
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