UK budget deficit soars on debt costs in setback for Reeves
DEBT interest costs pushed up UK government borrowing more than predicted last month, putting Chancellor of the Exchequer Rachel Reeves on course to overshoot official forecasts this year.
The budget deficit totalled £17.8 billion (S$29.7 billion) in December, more than double the £7.7 billion recorded a year earlier and the highest for the month since the pandemic, the Office for National Statistics said on Wednesday (Jan 22). Economists had expected £14.2 billion.
It left the shortfall in the first nine months of the fiscal year at £129.9 billion – £4.1 billion higher than forecast by the Office for Budget Responsibility (OBR) at the time of the budget on Oct 30.
Borrowing in December was driven by the cost of servicing inflation-linked bonds, which account for around a quarter of the total government debt stock. Overall debt costs were at £8.3 billion, £3.8 billion more than a year earlier.
There were also year-on-year increases in welfare payments and public-sector pay, and a large one-off payment for the repurchase of military homes. Total spending rose by £12.9 billion, far outstripping a £2.3 billion rise in tax receipts. Government revenue was held back by lower National Insurance Contributions, a payroll tax, following cuts to the rate earlier in 2024.
The worse-than-expected borrowing figures came despite a downward revision of £1.1 billion for the eight months to November. January typically delivers a large surplus but Reeves will still find it difficult to keep borrowing for the full fiscal year to the OBR’s £127.5 billion forecast.
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Gilts opened lower after the data, marginally underperforming European peers, with the 10-year yield rising one basis point to 4.6 per cent. The pound slipped, trading 0.1 per cent weaker at 84.48 pence per euro.
Stubborn inflation, a surge in gilt yields since the budget and a deteriorating growth outlook have left Reeves in danger of breaking her own fiscal rules, which require day-to-day spending to be covered by tax revenue by the 2029 to 2030 fiscal year.
At the budget, Reeves was deemed to have just £9.9 billion of headroom but that has likely been wiped out by the rise in government borrowing costs earlier this month.
Reeves has pledged not to raise taxes again after launching a £40 billion raid in October. She is said to favour spending cuts instead, opening Labour to criticism that it is returning to the austerity. With departmental spending plans beyond 2026 already tight, Reeves may also struggle to convince investors that she can deliver further cuts.
Speaking in an interview with Bloomberg news editor-in-chief John Micklethwait in Davos, Reeves admitted she had little room for manoeuvre against her fiscal rules. “So it’s tight and those fiscal rules are important to us because they are the sort of bedrock of that stability that I have spoken about. So we will continue to make decisions to ensure that we meet those fiscal rules,” she said.
Chief Secretary to the Treasury Darren Jones responded to the borrowing overshoot by insisting that the government’s “fiscal rules are non-negotiable and why we will have an iron grip on the public finances”. He promised to “root out waste” in the spending review, which is due in the summer.
“Although market interest rate expectations and gilt yields have fallen in the last week, they are still higher than at the time of the budget and suggest that the chancellor’s headroom against her fiscal rules has been whittled down,” said Alex Kerr, UK economist at Capital Economics. “The chancellor may need to raise taxes and/or cut spending in the next fiscal statement.”
Net debt stood at £2.83 trillion, 97.2 per cent of GDP in December, levels last seen in the early 1960s. However, the Labour government is targeting a wider gauge of debt known as public sector net financial liabilities, with a goal to have it falling as a share of the economy by the end of the decade. Last month, PSNFL was 84.5 per cent of GDP, or £2.46 trillion. That’s 1.9 percentage points higher than a year earlier.
Government investment was higher in December largely due to £1.7 billion being transferred for the repurchase of more than 36,000 military dwellings from Annington Homes. In December, the government agreed to pay £6 billion for the homes from a property company owned by UK financier Guy Hands, bringing a long-running dispute over the deal to an end. The agreement involved an immediate one-off payment by the government.
Commenting on the data, the OBR said the “upside surprise” relative to its own forecast in the fiscal year so far “reflects higher-than-expected borrowing by local authorities and public corporations, with central government borrowing – the largest sector – slightly below profile”. BLOOMBERG
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