(Bloomberg) --

UK government borrowing came in higher than forecast in the first four months of the fiscal year as soaring inflation drove up debt costs. 

A larger-than-forecast £4.9 billion ($5.8 billion) budget deficit in July took the total for 2022-23 so far to £55 billion pounds -- £3 billion more than officials forecast in March. Debt-servicing costs surged by 81% from a year earlier.

The figures raise fresh questions about the viability of tax cuts being promised by the two candidates bidding to succeed Boris Johnson as prime minister. 

In a scathing assessment this week, the Institute for Fiscal Studies accused both Liz Truss and Rishi Sunak of being irresponsible by offering tax giveaways at a time when borrowing is already set to overshoot. 

The highest inflation in 40 years is pushing up debt payments because they are tied to the Retail Prices Index, with welfare costs almost certain to follow. The Bank of England is predicting a lengthy recession, and pressure is growing for tens of billions pounds of extra support for households struggling with the cost of living.

“The latest numbers highlight the extent to which the fiscal outlook is worsening as the cost of borrowing rises, with record high energy costs, rapidly increasing prices and an economy close to recession expected to further drive up public spending in this and the next financial year,” said Alison Ring, public sector and taxation director at the Institute of Chartered Accountants in England and Wales.

Truss has pledged almost £40 billion of immediate tax cuts if she becomes prime minister, including reversing a payroll tax increase that took effect in April and cancelling a planned rise in corporation tax set to take place in 2023. Sunak has promised a yearlong suspension of VAT on domestic energy bills and said he’ll slash the basic rate of income tax by 2029. 

Neither is pledging specific spending cuts, and Truss in particular is counting on tax revenue remaining buoyant when the economy could be contracting.  

The budget deficit is typically smaller in July, a month when self-employed workers make tax payments. In March, the OBR had predicted tax and spending would be roughly in balance last month. Economists surveyed last week predicted a shortfall of £3.2 billion. 

Debt costs totaled £5.8 billion in July, almost £2 billion higher than the OBR forecast. It meant that downward revisions to the overall budget deficit since April were not enough to bring borrowing back into line. 

With inflation set to rise further, debt costs can be expected to remain high, particularly in October when energy are set to leap by around 75%.

Tax receipts remain supported by a tight labor market, with Pay As You Earn taxes from employees almost 13% higher in July than a year earlier. Those revenue will be hit if unemployment starts to increase, as the BOE predicts.

©2022 Bloomberg L.P.