Andy Bruce, William Schomberg

LONDON, (Reuters) – Rising inflation is driving up the British government’s debt interest bill dramatically and limiting Rishi Sunak, finance minister’s options for easing a cost of living squeeze in a tax announcement and spending announcement next month.

According to Tuesday’s data, there was a lower-than-usual January budget surplus. In January, income tax revenues are soaring in. However, economists believe that Sunak will have less room to maneuver as inflation continues to accelerate.

The surplus including state banks was 2.9 Billion Pounds (£3.9B) last month. That’s below the average estimate of 3.5B in a Reuters poll.

This was the first month that the monthly budget numbers have not been in the red since two years prior to the outbreak of the pandemic.

The surplus, however, was much smaller than the average for January 2020. It was almost 10 billion pounds in January 2020.

The government’s interest bill rose to 6.9 billion pounds in January due to inflation, which has reached a record high of 7% over 30 years. This is mainly due to the rise in the value of inflation-linked bonds.

The first ten months of the fiscal year ending March 31st, 2021/22, saw interest payments jump by 80% to almost 60 billion pounds. This was more than the entire deficit that Britain had in the previous year prior COVID-19.

INFLATION STAIN

British households are being hit hard by the inflation spike, which is caused both by the soaring energy prices and the effects of the pandemic.

Sunak announced already measures to mitigate the damage from April’s 54% energy tariffs increase, but is being pressured to make more. A budget statement will be expected to be released on March 23 to address this demand. This comes shortly before Social Security contributions rise.

According to the National Institute of Economic and Social Research (a think tank), a combination of higher inflation and a payroll tax increase could cause 30,000 more people to be homeless in Britain.

Sunak’s Tuesday data revealed some flexibility.

Revenues from taxes were 29 billion more than the official predictions in the 10 first months of the fiscal year 2021/22. However, spending on inflation linked bonds as well as public services, including rail subsidies was 9 billion less.

Between April 2013 and January 2014, the amount of accrued borrowing was only half what it was in the same time period as 2020/21 during which the pandemic crisis reached its worst.

Sunak emphasized the importance of being prepared for any risks.

He stated that “our debt has increased significantly and there are additional pressures on our public finances including rising inflation.”

It is vital that we keep the public finances on an economically sustainable course so the British can help when they need it, and not burden future generations with large debt payments.

The Office for Budget Responsibility in Britain, Britain’s fiscal watchdog said that there would be “large upside surprises (in debt interest costs)” in the next few months. This is in contrast to the October forecast.

The stock of British public debt is 2.32 trillion Pounds. This represents nearly 95% of the country’s gross domestic product. It was 82% at the time of pandemic.

Capital Economics economist Bethany Beckett said that the public finances would end the fiscal year in better condition than Sunak’s forecasts, however, the deficit next year looked set to exceed Sunak’s projections by at least 30 billion pounds.

Widely expected, the Bank of England will raise interest rates next month for its third meeting in succession. This is to try to stop inflation’s rise from getting entrenched.

KPMG UK’s economist Michal Stelmach stated that early 2022 fiscal results were likely to be better than Tuesday’s data. About 20% of taxpayers used a month-long extension in filing tax returns.

($1=0.7359 pounds)