Cost Of Inflation-Linked Debt Pushes Up UK Borrowing

By Wiktor Szary and Jason Douglas Features Dow Jones Newswires

U.K. public finances posted a monthly surplus in July, with production, income and wealth tax receipts growing strongly, but the overall borrowing in the first four months of the fiscal year grew significantly compared with last year, as above-target inflation pushed up the cost of servicing Britain's debt.

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Public-sector borrowing to cover the shortfall between taxes and spending was GBP22.8 billion ($29.38 billion) in the first four months of the fiscal year, the Office for National Statistics said Tuesday, GBP1.9 billion more compared with the same period last year.

The rise in borrowing was driven largely by the cost of servicing inflation-linked government debt, which stood at GBP21.6 billion in the April-July period, GBP4 billion higher than in the corresponding period last year. In July itself, the cost of servicing the U.K.'s debt rose by over GBP700 million on the year.

About a third of the total government debt stock is linked to inflation, which stood at 2.6% in July, down from May's peak of 2.9%, but still significantly above the Bank of England's 2.0%.

Payments to the European Union, the ending of which featured prominently in last year's Brexit referendum campaign, also increased by GBP1.5 billion in the four months compared with last year, and stood at GBP4.2 billion.

In July itself, however, the government posted a small surplus, of GBP0.2 billion, with value-added and income tax receipts growing strongly compared with the same month last year,

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The increase in borrowing comes as Treasury chief Philip Hammond faces renewed pressure to ease a squeeze on public spending that has been a centerpiece of government economic strategy for years.

The Chancellor of the Exchequer is set to present fresh tax and spending plans to Parliament in the fall.

Write to Wiktor Szary at Wiktor.Szary@wsj.com and Jason.Douglas@wsj.com

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August 22, 2017 04:48 ET (08:48 GMT)