The UK’s public sector net borrowing more than doubled in December, reaching £17.8 billion, driven by surging interest payments and increased government borrowing. This marks the highest December borrowing in four years, according to the Office for National Statistics (ONS), exceeding both Office for Budget Responsibility (OBR) and economist projections.
Key Figures: Borrowing and Interest Costs
- Public Sector Net Borrowing: Up by £10.1 billion year-on-year to £17.8 billion, surpassing the OBR forecast of £14.6 billion.
- Day-to-Day Borrowing: Increased by £7.3 billion to £10 billion, the largest December deficit in two years.
- Interest Payments on Debt: Totaled £8.3 billion, exceeding the OBR’s forecast by £0.5 billion.
Fiscal Year-to-Date Borrowing: Reached £129.9 billion, up £8.9 billion from the same period in the previous financial year.
Economic Pressures on Chancellor Rachel Reeves
The surge in borrowing underscores the economic challenges facing Chancellor Rachel Reeves, as the UK grapples with:
- High Borrowing Costs: Rising government bond yields reflect investor demand for a higher risk premium, driven by concerns over inflation and fiscal stability.
- Weaker Economic Growth: Slower growth limits the government’s ability to generate revenue through taxes, exacerbating fiscal pressures.
Capital Economics economist Alex Kerr predicts the budget deficit for the 2024/25 financial year will likely exceed OBR forecasts by £0.8 billion, despite some of the overshoot being attributed to a one-off payment.
Market Reaction and Investor Sentiment
Recent movements in UK government bond yields signal diminishing confidence among investors, who demand higher returns to compensate for risks associated with the UK’s fiscal position. This reflects broader market concerns over the country’s:
- Inflation Outlook: Persistent inflationary pressures threaten to prolong higher interest rates.
- Fiscal Strength: Rising deficits raise questions about the government’s ability to manage debt sustainably.
Outlook and Challenges
Chancellor Reeves faces a difficult balancing act between fiscal discipline and addressing public sector demands. Key priorities include:
- Reducing borrowing costs by improving investor confidence.
- Implementing measures to stimulate economic growth without exacerbating inflation.
- Managing day-to-day public sector spending to avoid further strain on public finances.
Conclusion
The doubling of the UK budget deficit in December underscores mounting fiscal challenges amid high interest payments and borrowing costs. Chancellor Rachel Reeves must navigate these pressures carefully, as the government’s fiscal policy decisions will significantly impact economic stability and investor sentiment in the coming years.