Faisal Islam: Inflation and borrowing squeeze UK Budget
UK inflation reached 3.5% and government debt topped £3 trillion, while borrowing ran ahead of forecasts. BBC economics editor Faisal Islam says the figures…
UK inflation reached 3.5% as government debt topped £3 trillion, putting pressure on Chancellor John Healey ahead of next week’s Budget. BBC economics editor Faisal Islam reported that borrowing is running ahead of forecasts as spending and interest costs rise.
The figures sharpen a difficult trade-off: Healey has said he wants to give consumers “breathing space” from cost-of-living pressures, while the government faces higher costs and borrowing. The latest data arrived as the chancellor travelled to North East Scotland on Wednesday to announce new North Sea energy approvals.
Prices could keep rising
Inflation was expected to increase after petrol and diesel prices surged, in some cases to records. But Islam said other measures of underlying inflation also rose, with early signs of price pressure in areas including airfares and computer game downloads.
That matters because the figures suggest price rises may prove more persistent than an energy-driven jump alone. Capital Economics now expects the main measure of inflation to peak at 4.2% next year, according to the BBC report.
The Bank of England closely monitors services inflation and core inflation. The latest readings, Islam wrote, significantly raise the odds of an interest-rate increase next month. Services cover sectors including law, banking, retail, hospitality and tourism, and make up the vast majority of UK economic output.
For households, the inflation figure also feeds into payments. September’s consumer price index measure determines next April’s uprating for benefits including personal independence payment and carer’s allowance. The Triple Lock will also see the State Pension rise by 3.9% next April, the report said.
Debt limits the Budget choices
Higher inflation can raise tax receipts in cash terms while tax thresholds are frozen. Yet it also pushes up the cost of public services, including potential pay demands from unions. That leaves the government balancing support for households against the expense of delivering public services and servicing debt.
Food price inflation remains largely unaffected by the energy shock, offering a limited point of relief in the latest figures. The broader public-finance picture is less forgiving: government borrowing costs have risen alongside those in most advanced economies as the US-Israel war against Iran has intensified, Islam reported.
The government’s decision on the Jackdaw gas field is viewed as the start of a series of “pro growth” announcements ahead of the Budget. Islam said it sends a signal, but does not fundamentally alter the choice between easing cost-of-living pressures and presenting a Budget that satisfies markets and investors.
A narrower gap between UK borrowing costs and those of other G7 nations, along with praise from the IMF for planned borrowing reductions, has provided a platform for the chancellor. Still, the latest figures show the scale of the task: UK government debt has passed £3 trillion for the first time in official figures.
Source: bbc.co.uk
