Higher debt interest payments pushed UK public sector borrowing up last month to much higher levels than economists were expecting, laying bare the challenges facing the next prime minister.
Public sector net borrowing was £20bn in September, £2.2bn more than in the same month last year, and the second highest September borrowing figure since monthly records began in 1993, according to data published by the Office for National Statistics on Friday.
The figure was much larger than the £14.8bn forecast in March by Office for Budget Responsibility, the UK’s official watchdog, and was also higher than the £17bn forecast by economists polled by Reuters.
Interest payments on government debt rose to £7.7bn in September, £2.5bn more than in the same month last year. Higher Interest payments reflect the rise in the retail price index to which index-linked gilts are linked.
Sterling fell and gilt yields rose on Friday morning after the borrowing data and retail sales data came in worse than expected. Yields on the 10-year gilt rose 0.07 percentage points to 3.98 per cent, while the pound fell 0.14 per cent against the dollar to $1.121.
Responding to the public finances figures, chancellor Jeremy Hunt said: “To stabilise markets, I’ve been clear that protecting our public finances means difficult decisions lie ahead.”
However, the latest figures suggest that will not be an easy task.
Ruth Gregory, senior UK economist at Capital Economics, said that the further overshoot of the OBR’s March public borrowing forecast “won’t make the next prime minister’s task any easier in navigating the economy through the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis.”
She calculated that for the full financial year the chancellor will need to reveal further policy measures of about £34bn to fill the fiscal hole and restore credibility in the eyes of the financial markets.
Hunt is due to deliver his ‘medium-term fiscal plan’ on October 31 but some economists are suggesting it could be delayed by the upcoming Tory party leadership election.
James Smith, an economist at ING, said that from the perspective of gilts, “all investors really want to see is a credible fiscal trajectory,” from whoever takes over as UK prime minister following the resignation of Liz Truss.
Central government receipts were £71.2bn in September, which was £7bn more than in the same month last year, thanks to higher tax receipts.
However, government spending rose to £79.3bn, £5.8bn above the same month last year. In addition to interest payments, spending increased as a result of a £4.4bn increase in net social benefit payments to help households with their winter energy bills.
Enhanced Winter Fuel Payments, which are paid out during November and December, are recorded each September. These were partially offset by a £1.4bn reduction in subsidy payments as the coronavirus measures came to an end.
September borrowing figures do not include measures such as the universal £400 energy bill rebate and the energy price freeze that will add to spending from October. These could significantly raise borrowing for the rest of the year.
Better news came from the borrowing in the financial year to September, which was £72.5bn, £24.9bn less than in the same period last year and marginally lower than what was forecast by the OBR.
Nonetheless, the extra funding required by the government over the course of the pandemic, combined with reduced cash receipts and a shrinking economy have all helped to push public sector net debt, or borrowing accumulated over time, to 98 per cent of GDP at the end of September, a level last seen in the early 1960s.
