UK borrowing costs rose unexpectedly to £17.8billion in December, but Chancellor Rachel Reeves remains confident in the country’s financial health following the October budget.
This figure was around 25 per cent higher than what economists had predicted and was £10.1billion more than the same time last year, making it the highest borrowing in December for four years.
The unexpected rise puts pressure on Reeves to make tough decisions on budget cuts before the upcoming spending review in the summer.
The UK’s budget deficit was larger than expected in December, largely due to high debt interest costs and a one-off military housing purchase, according to new data released on Wednesday.
Public sector net borrowing reached £17.8billion ($21.93billion) in December, the Office for National Statistics (ONS) reported. Economists had predicted borrowing would be around £14.1billion.
The UK’s budget deficit was larger than expected in December
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The ONS said that a significant part of the borrowing came from an £8.3billion debt interest bill, which was the third-highest December total ever. Additionally, a £1.7billion payment for repurchasing military homes added to the overall borrowing.
Reeves acknowledged the headroom to meet those targets in the final year of the economic forecast is “tight” but added “those fiscal rules are important to us because they are the bedrock, the foundation of that stability that I’ve spoken about”.
Speaking at the World Economic Forum in Davos, she insisted the country’s finances “were now in order” following her October budget.
She said: “Now we have wiped the slate clean, my instinct is to have lower taxes, less regulation, make it easier for businesses to do business.”
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She defended her approach to the public finances with her two fiscal rules of paying for day-to-day spending through tax receipts and bringing debt down as a share of gross domestic product.
“We will continue to make decisions to ensure that we meet those fiscal rules,” she said.
UK government borrowing in the current financial year has reached £129.9bn, £8.9 billion higher than the same period last year and a record outside the pandemic’s peak.
This borrowing is also £4bn above the £125.9 in forecast by the OBR. The increase follows volatility in the UK bond market, driving up borrowing costs and raising concerns about the Government’s ability to meet fiscal rules.
Higher bond yields, weaker growth, and rising inflation are expected to reduce the financial headroom, threatening fiscal stability.
The yield on UK 30-year bonds reached its highest level since 1998 before dropping back down when inflation data showed it had fallen to 2.5 per cent in December. The pound also dropped to a 14-month low of $1.22 in early January but has since risen slightly. This drop marked a sharp fall from the $1.34 level in September.
In response to the borrowing rise, Darren Jones, the Chief Secretary to the Treasury, said: “Economic stability is vital for our number one mission of delivering growth.
“That’s why our fiscal rules are non-negotiable and why we will have an iron grip on public finances. Through our Spending Review, we will examine every line of government spending for the first time in 17 years, rooting out waste to ensure taxpayers’ money is spent wisely.”
The next financial statement will be on March 26 and a budget in the autumn.
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The OBR will conclude whether the Government is set to miss its fiscal rules when it publishes its updated forecasts at the spring statement on March 26.
Jones said the Government will “interrogate every line of government spending for the first time in 17 years” to “root out waste to ensure every penny of taxpayers’ money is spent productively and helps deliver our plan for change”.
Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, said the Government will have to take action to ensure it meets its fiscal rules.
He said: “We expect the Government to outline spending reductions – backloaded towards the end of the forecast year – at the next fiscal event in March. Further tax increases at the next Budget in October is also a good bet.”