GDP: A Fiscal Pandora's Box Awaits

The UK’s debt burden approached 100% of GDP in May 2024, indicating significant challenges for the next government.

Official figures showed that borrowing in May increased the debt ratio from 98.1% to 99.8% of GDP, the highest since equivalent records began in 1993.

In order to stabilise public debt, the next government will need to find £30bn in savings or tax rises, according to the International Monetary Fund (IMF).

Both the Conservatives and Labour have promised to reduce the debt-to-GDP ratio within the next five years.

The ONS said that higher taxes and lower debt interest payments helped reduce the government’s borrowing bill more than expected in May. Public sector borrowing fell to £15bn, down from £15.7bn forecast by the Office for Budget Responsibility.

Borrowing was apparently driven lower by a drop in debt servicing costs on government bonds, which fell to £8bn last month from £9.2bn in April. This matched the drop in RPI to 3% last month, which is the lowest in three years.

Tax receipts rose by £2bn to £58.6bn in May, with increased VAT, Corporation Tax and income tax receipts. National Insurance collections fell by £900m after the government’s 2p reduction.

Michal Stelmach, senior economist at KPMG UK, said: “Government borrowing holds steady but the fiscal Pandora’s box awaits for the next Chancellor.

“The fiscal reality is similar for whichever party wins the general election. Interest rates are set to remain higher, debt more difficult to bring down, and spending pressures continue to mount.”