Rising inflation caused interest payments on government debt to treble in a year to reach record levels for December, official statistics show.
The government paid £8.1 billion in interest in December, which is 200 per cent higher than the £2.7 billion bill in the previous year, according to estimates from the Office for National Statistics. The increase is largely due to a rise in the retail prices index, which determines payouts on index-linked gilts.
The net level of borrowing came in at £16.8 billion, which is lower than the £18.5 billion forecast by economists and in broadly line with projections of £16.7 billion from the Office for Budget Responsibility (OBR). Nevertheless, it was the fourth-highest level of December borrowing on record after the first year of the pandemic in 2020 and the aftermath of the financial crisis in 2009 and 2010.
Rishi Sunak, the chancellor, said: “Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments. Our fiscal rules mean we will reduce our debt burden while continuing to invest in the future of the UK.”
Public sector debt, excluding bailouts for banks, was £2.34 trillion at the end of December, or about 96 per cent of GDP.
However, strong growth in tax receipts continues to keep public sector net borrowing, which is the difference between what the government spends and what it receives in taxes, in line with the OBR’s projections. Tax receipts of £68.5 billion were well above the £64.3 billion anticipated by the forecaster. Borrowing from April to December last year came to £146.8 billion, 8.1 per cent below the level anticipated by the OBR due to a stronger bounceback in the labour market than expected after the end of the furlough scheme.
This gives the chancellor enough headroom to set out a plan to deal with the rising cost of living, according to James Smith, research director at the Resolution Foundation. “With soaring energy bills set to push around six million families into fuel stress, a targeted package to limit the rise in energy bills is the top priority, with the majority of gains from a delayed national insurance increase going to the richest fifth of households,” he said.
Martin Beck, chief economic adviser to the EY Item Club, expects that borrowing could still come in below the OBR’s forecast of £183 billion by the end of the fiscal year in April. “However, this will be influenced by what, if any, measures the government announces to take the pressure off households’ finances from rising energy bills,” he said.
The Bank of England’s monetary policy committee will meet next week to decide what steps to take after it increased interest rates for the first time since 2018 in its December meeting. Inflation came in at 5.4 per cent in December, the highest level recorded in nearly 30 years.
Samuel Tombs, chief UK economist at the Pantheon Macroeconomics consultancy, predicted that the chancellor would take action to limit the impact of rises in energy prices before April, but would continue with the increase in national insurance contributions, which comes into play at the same time. “The chancellor’s fiscal rules do very little to tie his hands,” he said. “Mr Sunak must only set out plans on paper for the debt-to-GDP ratio to be falling in the third year of the rolling forecast period; his borrowing in 2022/23 is unconstrained. We think, therefore, that some form of intervention from the Treasury to limit the increase in Ofgem’s energy price cap in April is likely.”
He added: “We doubt, however, that the chancellor will defer the introduction of the increase in national insurance contributions in April, at an annual cost of £12.7 billion, as it is best politically to get large tax rises out of the way well before the next election, which likely will be held in May 2024.”