Borrowing surges to four-year high in blow to Chancellor

Chancellor Rachel Reeves is facing further pressure over Britain’s public finances after official figures showed a bigger-than-expected surge in government borrowing last month to nearly £18 billion.

The Office for National Statistics (ONS) said public sector net borrowing stood at £17.8 billion in December – the highest level for four years.

Borrowing was £10.1 billion higher than the same month last year and more than the £14.2 billion expected by most economists.

The ONS said borrowing was driven higher by spending on public services and benefits, as well as rising debt interest payments, with an increase in tax receipts also offset by the previous government’s move to cut national insurance.

Borrowing in the financial year so far is £129.9 billion, £8.9 billion more than the same period a year earlier and a record outside of the mammoth borrowing seen at the height of the pandemic in 2020.

Year-to-date borrowing is also about £4 billion more than the £125.9 billion forecast by Britain’s independent fiscal watchdog, the Office for Budget Responsibility (OBR).

It comes after volatility in the UK Government bond market at the start of the year, which sent public sector borrowing costs soaring and led to fears that Ms Reeves is on track to miss her fiscal rules.

Higher yields on government bonds – or gilts – as well as weaker-than-expected growth and forecasts for rising inflation are seen trimming Labour’s already slim £9.9 billion financial headroom and putting the stability rule under threat.

Ms Reeves acknowledged the headroom to meet those targets in the final year of the economic forecast is “tight” but added “those fiscal rules are important to us because they are the bedrock, the foundation of that stability that I’ve spoken about”.

At a Bloomberg event at the World Economic Forum in Davos, she defended her approach to the public finances with her two fiscal rules of paying for day-to-day spending through tax receipts and bringing debt down as a share of gross domestic product.

“We will continue to make decisions to ensure that we meet those fiscal rules,” she said.

The Chancellor has previously ruled out both increasing borrowing and raising taxes following the significant tax increases in October’s Budget, leaving her with few options beyond further spending cuts.

The OBR will conclude whether the Government is set to miss its fiscal rules when it publishes its updated forecasts at the spring statement on March 26.

The latest borrowing figures estimated that public sector net debt, excluding taxpayer-backed banks, reached 97.2% of gross domestic product (GDP) at the end of last year; up from 96.9% a year earlier and staying at levels last seen in the early 1960s.

The ONS said debt interest payments surged by £3.8 billion year on year last month due to higher Retail Prices Index inflation, which impacts index-linked gilt stock.

Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, said the Government will have to take action to ensure it meets its fiscal rules.

He said: “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.”