The UK government borrowed a staggering £17.8 billion in December, the highest figure for the month in four years, significantly exceeding expectations and placing increased pressure on Chancellor Rachel Reeves. This surge in borrowing raises concerns about the country’s fiscal health and potential implications for future economic policy.
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Official data released by the Office for National Statistics (ONS) revealed that public sector net borrowing, the difference between government spending and income, was £10.1 billion higher than in December 2023. This figure also surpassed the £14.1 billion forecast by economists polled by Reuters and the Office for Budget Responsibility’s (OBR) estimate of £14.6 billion. Jessica Barnaby, ONS deputy director for public sector finances, highlighted the significance of this borrowing, stating that it was the third highest December borrowing on record. Increased spending on public services, benefits, debt interest, and capital transfers contributed to this surge, while a rise in tax receipts was partially offset by reduced National Insurance contributions following rate cuts earlier in 2024.
Skyrocketing Borrowing Costs and Rising Debt Levels
As a result of December’s borrowing, total borrowing costs for the fiscal year reached £129.9 billion, a stark contrast to the £8.9 billion borrowed in 2023. This marks the second-highest financial year-to-December borrowing since records began in 1993. The current budget deficit, which represents borrowing for day-to-day public sector activities, also widened to £10.0 billion in December, £7.3 billion more than in December 2023. Furthermore, net debt, excluding public sector banks, climbed to 97.2% of GDP in December, a 0.3% increase from the end of 2023 and the highest level since the early 1960s. This escalating debt burden raises concerns about the UK’s long-term fiscal sustainability.
Impact of Rising Interest Rates and Potential Policy Responses
The interest payable on central government debt reached £8.3 billion in December 2024, £3.8 billion higher than in December 1997. This increase is partly attributed to a recent sell-off in UK government bonds (gilts), which pushed yields higher and consequently increased borrowing costs. These rising costs have sparked concerns about potential pressure on Chancellor Reeves to implement further tax increases and spending cuts.
Alex Kerr, UK economist at Capital Economics, noted that while market interest rate expectations and gilt yields have recently declined, they remain elevated compared to the budget forecast. This suggests a reduction in the Chancellor’s fiscal headroom, potentially necessitating tax hikes or spending cuts to meet fiscal rules in the upcoming fiscal statement on March 26th.
Fiscal Challenges and Economic Outlook
In the autumn statement, Chancellor Reeves announced £40 billion in tax rises to fund spending, including higher national insurance contributions for employers. These tax increases, along with a rise in the national minimum wage, have raised concerns among retailers about the impact of higher costs on their businesses. Joe Nellis, economic adviser at MHA, emphasized that the higher-than-expected borrowing further reduces the Chancellor’s fiscal flexibility, intensifying the strain on central government expenditure. Concerns about stagflation, a combination of persistent inflation and stagnant economic growth, are also brewing in the UK.
Recent ONS data showed a surprising drop in UK inflation to 2.5% in December and a return to economic growth in November with a 0.1% expansion. While these figures offered a glimmer of hope for potential interest rate cuts by the Bank of England, recent data indicating faster-than-expected UK pay growth in November has reignited concerns about lingering inflationary pressures, potentially delaying rate cuts. The Chancellor faces a challenging task in navigating these complex economic conditions and ensuring the UK’s fiscal sustainability. The upcoming fiscal statement in March will be crucial in outlining the government’s strategy to address these challenges.
