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The UK government borrowed far more than expected in December, underlining the scale of the challenge facing chancellor Rachel Reeves as she tries to restore confidence in her fiscal plans and turn around a stagnating economy.
Borrowing — the difference between public sector spending and income — was £17.8bn last month, £10.1bn more than in December 2023, and the third highest in any December on record, data from the Office for National Statistics showed on Wednesday.
In the first nine months of the fiscal year borrowing was £129.9bn, which was £8.9bn more than in the same period in the previous fiscal year, and the second-highest borrowing in the April to December period since monthly records began in January 1993.
The figures intensify the pressure on Reeves who has sought to reassure investors after the UK’s borrowing costs this month climbed to the highest level since the global financial crisis, threatening her ability to meet a self-imposed fiscal rule in which day-to-day spending is covered by tax receipts.
Alex Kerr, economist at the consultancy Capital Economics, said: “Against a backdrop of slowing GDP growth and high interest rates, December’s overshoot in borrowing is further disappointing news for the chancellor.”
December’s rise was led by an increase in the cost of interest payments on inflation-linked bonds and a one-off payment to repurchase military accommodation.
It was above the £14.1bn expected by economists polled by Reuters, and the £14.6bn forecast by the Office for Budget Responsibility, the UK fiscal watchdog, in its most recent set of projections made in October.
UK borrowing costs have eased since figures last week showed inflation unexpectedly slowed in December, and a global bond sell-off abated.
Reeves has promised to set out plans to turn around the economy, which grew just 0.1 per cent in November after mild contractions in September and October, with businesses blaming Reeves’ tax-raising October Budget for chilling confidence and hitting the labour market.
The OBR, which has to produce two forecasts every financial year, will provide an update on March 26 on whether Reeves is still on track to meet her own borrowing rules.
Given the Budget gave Reeves just £9.9bn in wriggle room to meet her fiscal rule, Kerr said there was an increasing risk that the chancellor would need to cut spending or raise taxes, and that her headroom has been whittled down to £2bn.
Following the release of December’s borrowing figures, Darren Jones, 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 the public finances.”
Elliott Jordan-Doak, economist at the consultancy Pantheon Macroeconomics, said that the OBR’s forecasts remain “subject to significant upside risks”.
“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,” he added.
Sterling remained 0.2 per cent lower at $1.23 following the release of the figures. Gilts were largely flat, with the 10-year gilt yield at 4.59 per cent.
In a sign of the strain on public finances from higher inflation, interest costs were £8.3bn in December, £3.8bn higher than a year earlier and the third-highest December figure since monthly records began. A £1.7bn payment for the repurchase of military dwellings added to December’s borrowing.
Tax receipts in the month rose £4bn from December 2023 to £65.5bn.
Public sector debt, or borrowing accumulated over time, was 97.2 per cent of GDP, remaining at levels last seen in the early 1960s.
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