Fast-rising inflation is pushing up the British government's debt interest bill sharply, limiting finance minister Rishi Sunak's options to help ease a cost-of-living squeeze when he delivers his budget next month.

Data published on Tuesday showed a smaller-than-usual budget surplus in January, a month when income-tax revenues typically flood in, and economists said inflation's continued acceleration would put further strain on the public finances.

Excluding state banks, the surplus totalled 2.9 billion pounds ($3.9 billion) last month, smaller than an average forecast of 3.5 billion in a Reuters poll of economists.

It was the first time the monthly budget figures did not go into the red since the pandemic struck two years ago.

But the surplus was smaller than is usual for the start of the year: in January 2020, it was nearly 10 billion pounds.

Inflation, which is running at a 30-year high and looks set to top 7% in April, pushed up the government's interest bill to 6.1 billion pounds in January, an increase of 4.5 billion over the same month last year, mostly due to higher payments on inflation-linked bonds.

In the first 10 months of the 2021/22 financial year, interest payments were up 80% at nearly 60 billion pounds, which is more than Britain's entire budget deficit in the year before COVID-19 hit.

INFLATION STRAIN

The jump in inflation, caused by surging energy prices and the after-effects of the pandemic on the global economy, is also putting a strain on the finances of many British homes.

Sunak has already announced measures to smooth out the hit from April's 54% increase in energy tariffs, but he is under pressure to do more in a budget statement expected on March 23, shortly before social security contributions go up.

A think tank, the National Institute of Economic and Social Research, has estimated that the higher payroll tax payments, combined with higher inflation, could drive a 30% rise in destitution in Britain.

"Our debt has increased substantially and there are further pressures on the public finances, including from rising inflation," Sunak said after Tuesday's data.

"Keeping the public finances on a sustainable path is crucial so we can continue helping the British people when needed, without burdening future generations with high debt repayments."

Britain's stock of public debt stands at 2.32 trillion pounds, or nearly 95% of gross domestic product, up from about 82% immediately before the pandemic struck Europe.

In the 2021/22 financial year so far, Britain borrowed 138.5 billion pounds, about half the amount in the same period a year earlier, which included the height of the COVID-19 crisis.

Bethany Beckett, an economist with Capital Economics, said the public finances were currently coming in below forecasts set by the government's fiscal watchdog that underpin Sunak's budget decisions, but would probably overtake them soon.

"We expect the combination of higher inflation and interest rates to keep pushing borrowing above the Office for Budget Responsibility's forecast in the coming months," she said.

"That will be unwelcome news for the chancellor."

The Bank of England is widely expected to raise interest rate for a third meeting in a row next month as it tries to stop the rise in inflation from becoming entrenched.

Michal Stelmach, an economist at KPMG UK, said the early 2022 fiscal performance was probably better than Tuesday's data suggested because about 20% of taxpayers had taken advantage of a month-long extension for filing their tax returns.

($1=0.7359 pounds)

(Reporting by William Schomberg and Andy Bruce; Editing by Alex Richardson and Clarence Fernandez)