Getting back into the black was the great Tory promise of the past decade.
After years of budget deficits followed by a borrowing blowout in the financial crisis, then-Chancellor George Osborne’s pledge in his 2010 emergency budget was to get back to an annual surplus by 2014-15.
Earlier that month Osborne had warned “our national debt has doubled and is set to double again in the space of just five years.”
It risked serious consequences for the nation, he said: “Countries that cannot live within their means face higher interest rates, greater economic shocks and larger debt interest bills.”
At the time the national debt was just over £1 trillion. Now, after 12 years of Conservative chancellors, it has doubled to just over £2 trillion.
That is not the way it was supposed to go. The pandemic clearly played a big role – £425bn has been added to the mountain since March 2020 – but in no year did the Government manage to reduce its debt as had been hoped when the mighty deficit reduction battle began.
With the economy sitting under piles of debt, the future is not looking great either.
Rishi Sunak, Osborne’s successor-but-two, has stressed the need to keep a tight hold on the purse strings – yet the finances risk running away from him anyway.
That is because the Chancellor only has partial control over the money he spends, and much less over the revenues he raises.
At the time of his Spring Statement in March, the Office for Budget Responsibility (OBR) expected the economic recovery would help boost tax revenues and drag borrowing down sharply from £127.8bn last financial year to £99.1bn this year – still a large sum, but a remarkable turnaround from the pandemic-year’s borrowing of more than £320bn.
Yet just two months into the new financial year, that picture is fraying at the edges.
Borrowing for April and May has come in at £35.9bn, more than one-fifth above the £29.5bn anticipated by the OBR. Michal Stelmach at KPMG expects borrowing to end up around £20bn above the OBR’s forecast.
Tax receipts are up on the year, reflecting the extent of the economic recovery compared with May 2021 when the economy was still suffering from assorted Covid restrictions, as well as hikes on levies such as the national insurance raid on workers and employers.
Spending is down, as furlough and other subsidy schemes have been dropped.
The big risks, however, come from inflation – for three reasons.
The cost of living crisis is sending the economic recovery into reverse, pressuring the Chancellor to spend more, driving up index-linked costs including debt interest and pensions.
The situation threatens to add to borrowing, piling on the debt and in turn making the problem worse.
First, the downturn.
Already, the economy shrank in March and April and the Bank of England expects it to shrink in the second quarter as a whole. It had already forecast a contraction in the final quarter of the year once the cap on household energy bills rises another 40pc in October.
That will leave the economy 0.25pc smaller next year, compared to this year, the Bank predicts, in a painful contrast with the OBR’s March forecast that foresaw a 1.5pc expansion in 2023.
That imperils tax receipts, as the money households spend on energy bills is taxed at 5pc. It means families can no longer spend as much money on other goods and services which typically incur VAT of 20pc, so the Government’s coffers suffer.
Second comes the Chancellor’s response.
Usually he only sets out big tax and spending plans in the Spring Statement and the Budget, but so far this year Sunak has already dished out extra support on bills, in February and again in May.
The Chancellor has put the total at £37bn, a significant extra expense just as he is trying to get borrowing back under control.
Much of the aid comes in the form of payments aimed at lowering energy bills next winter, so he hopes no extra packages will need to be announced.
But pressure is building. The Bank has upgraded its forecast for the peak in inflation to more than 11pc, raising more demands for extra cash handouts or tax cuts.
Sunak also faces growing demands for higher public sector pay awards.
State sector workers’ earnings in April were up 1.5pc on the year, even as prices climbed 9pc. Pay packets among their counterparts in the private sector rose by an average of 6.8pc – still not matching inflation, but not as far off.
So much for the payments over which the Chancellor has control.
He has much less of a say on the third category of costs: index-linked spending.
State pensions are going to rise by around 10pc next year, as the triple lock is back in force, which means April 2023’s increase will match this September’s rise in prices.
A range of benefits, including child benefit and universal credit are also linked to inflation as measured by the consumer price index (CPI).
Yet the biggest unexpected extra bill in May’s public finances figures came from debt interest.
Around one-quarter of the national debt is linked to inflation, using the retail price index – an outdated measure which tends to come in higher than the CPI figure favoured by the Bank. By that measure, inflation hit 11.7pc in May.
The debt interest bill jumped to £7.6bn for the month, up by more than £3bn compared with last May. Debt interest now soaks up 6.1pc of Government revenues, more than double the 2.4pc it snaffled a year ago.
This is the steepest debt interest ratio since September 2012, when Osborne was not long into his campaign to get the deficit down.
It indicates that the long years of falling market interest rates, which helped Britain sustain its ever-growing national debt, are coming to an end, with potentially painful consequences as debt never stopped rising.
That leaves Sunak with less fiscal wiggle room to deliver the tax cuts the Chancellor says he wants to offer, even as inflation-pressed families and businesses need all the help they can get.