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Public borrowing in focus for Sunak as inflation hits interest payments

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Chancellor of the Exchequer Rishi Sunak addresses the Conservative Party Conference in Manchester. Picture date: Monday October 4, 2021. Photo credit should read: Matt Crossick/Empics
Chancellor Rishi Sunak faces some difficult choices in the upcoming budget. Photo: PA Matt Crossick/Empics

Interest payments on COVID-19 pandemic spending bills racked up to £4.8bn ($6.6bn) in September as inflation rose, according to the latest release from the Office for National Statistics (ONS). 

The charges were the same amount as last year, despite improved conditions due to lower borrowing and higher tax receipts. 

The ONS said this is due to the Retail Price Index measure of inflation rising – which is linked to government interest payments.

Overall, public sector net borrowing fell more than expected in September. Excluding public sector banks (PSNB ex) borrowing was estimated to have been £21.8bn in September 2021; this was the second-highest September borrowing since monthly records began in 1993, £7bn less than in September 2020. 

Central government receipts in September 2021 were estimated to have been £62.3bn, £6.2bn more than in September 2020; while central government bodies spent £84.1bn in September 2021, £1.3bn less than in September 2020.

"The problem is there’s still a big gap between income and expenditure and every month is just adding a little more to that debt mountain, which now stands at an eye-watering 95.5% of GDP," said Danni Hewson, AJ Bell financial analyst.

"The chancellor knows he has to get borrowing under control but he’s also hyper-aware that simply turning off the taps could leave the country floundering in a muddy puddle."

The predicament poses challenges for chancellor Rishi Sunak as the government's next budget looms next week. The government has been criticised in recent months on how it is managing the cost of living amid cuts to Universal Credit and rising prices. 

Read more: Barclays 'well positioned' for rising interest rates as Q3 beats expectations

“Our recovery is well underway – with more employees on payrolls than ever before and the fastest forecast growth in the G7 this year – but the pandemic has had a huge impact on our economy and caused our debt levels to rise," said Sunak.

“At the Budget and Spending Review next week I will set out how we will continue to support public services, businesses and jobs while keeping our public finances fit for the future.”

Watch: What is inflation and why is it important?