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 Chancellor Rachel Reeves under immense pressure to address the growing fiscal challenge. This surge in borrowing adds to concerns about the nation’s economic health and the Chancellor’s ability to meet fiscal targets.
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The Office for National Statistics (ONS) reported on Wednesday that public sector net borrowing, the difference between government spending and revenue, was £10.1 billion higher than in December 2023. This figure dwarfed 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 that December’s borrowing was the third highest on record for any December, driven by increased spending on public services, benefits, debt interest, and capital transfers. While tax receipts rose, they were partially offset by a reduction in National Insurance contributions due to earlier rate cuts in 2024.
Record Borrowing Raises Concerns about Fiscal Sustainability
This latest data brings the total borrowing for the financial year to date to a staggering £129.9 billion, a significant leap from £8.9 billion in the same period of 2023. This represents the second-highest financial year-to-December borrowing since records began in 1993. The current budget deficit, which reflects borrowing for day-to-day public sector activities, reached £10.0 billion in December, £7.3 billion more than in December 2023. Net debt, excluding public sector banks, climbed to 97.2% of GDP in December, the highest level since the early 1960s, raising concerns about long-term fiscal sustainability.
Rising Borrowing Costs Compound Fiscal Challenges
The interest payable on central government debt reached £8.3 billion in December 2024, a substantial increase of £3.8 billion compared to December 1997. This rise is partly attributable to a recent sell-off in UK government bonds (gilts), which pushed yields higher and consequently increased borrowing costs. This development has sparked fears that Chancellor Reeves will be forced to implement further tax increases and spending cuts to manage the escalating debt burden. Alex Kerr, UK economist at Capital Economics, notes that while market interest rate expectations and gilt yields have recently fallen, they remain higher than at the time of the budget. This suggests that the Chancellor’s fiscal headroom, the margin against her fiscal rules, has shrunk considerably, potentially necessitating further fiscal tightening measures in the upcoming fiscal statement on March 26th.
Chancellor Faces Tough Choices Amidst Economic Uncertainty
In the autumn statement, Reeves announced £40 billion in tax rises to fund spending, including higher national insurance contributions for employers. These tax hikes, coupled with the increase in the national minimum wage, have prompted warnings from retailers about the impact of higher costs on their businesses. Joe Nellis, economic adviser at MHA, emphasizes that the higher-than-expected borrowing leaves the Chancellor with even less fiscal room to maneuver. Increased borrowing and rising borrowing costs have placed significant strain on government expenditure, potentially limiting the government’s ability to respond to economic challenges. Concerns about “stagflation,” a scenario of persistent inflation and stagnant economic growth, are also growing.
Recent economic data paints a mixed picture. While UK inflation fell unexpectedly to 2.5% in December and the economy returned to modest growth in November, faster-than-expected pay growth in November has rekindled concerns about inflationary pressures, potentially delaying anticipated interest rate cuts by the Bank of England. The confluence of high borrowing, rising debt costs, and economic uncertainty presents significant challenges for the Chancellor and raises questions about the UK’s fiscal path forward.
