Unexpected surge in UK borrowing puts pressure on Rachel Reeves Government borrowing

Government borrowing unexpectedly rose to £17.8 billion last month, putting pressure on Rachel Reeves to plan budget cuts ahead of a summer spending review.

The figure was about a quarter higher than the City of London's forecast and was an increase of 10.1 billion pounds on the same period last year, making it the highest December borrowing in four years.

Economists polled by Reuters had forecast public sector net borrowing, excluding public sector banks, to be 14.1 billion pounds in December, up from 11.25 billion pounds in November.

The Office for National Statistics (ONS) said spending on government services, benefits and interest on debt increased.

Capital Economics said the latest data showed Reeves' financial headroom had been eroded. The chancellor allowed parliament to provide a buffer of £9.9 billion in the autumn budget, but the consultancy said the latest data showed the buffer may have fallen to around £2 billion.

“This, coupled with economic weakness, suggests that in order to meet fiscal rules, the chancellor may need to raise taxes and/or cut spending in his next fiscal statement on March 26,” the report said.

In order not to violate Reeves' fiscal rules, which require daily spending to be matched by tax revenue, and to rule out increasing borrowing or taxes, the Treasury said it was considering implementing spending cuts.

Whitehall department chiefs are preparing to review budgets and cut costs ahead of a three-year spending review expected to be agreed in June by the Treasury.

Growth over the past six months has been slower than budget forecasts and rising debt financing costs due to rising interest rates on government debt are also expected to intensify the spending squeeze.

The data covers a period when UK borrowing costs have been rising, but not before global bond market turmoil earlier this month sent government debt yields – and indeed interest rates – soaring.

UK 30-year bond yields rose to their highest levels since 1998 last week before retreating after data showed inflation fell to a lower-than-expected 2.5% in December.

Currency traders responded to the uncertainty by sending the pound down to a 14-month low of $1.22 in early January before inching up 2 cents last week. Last September, the pound was trading at $1.34 against the dollar.

Darren Jones, principal secretary of the U.S. Department of the Treasury, said: “Economic stability is critical to our primary mission of growth; that’s why our fiscal rules are non-negotiable and why we maintain an iron fist on our public finances. “

Financial statements will be released on March 26, followed by a budget in the autumn. The Office for Budget Responsibility, the official independent economic forecaster, will conduct a health check on the government's budget targets at both events.

Jones said the government would “review every aspect of government spending for the first time in 17 years” to “root out waste and ensure every penny of taxpayers' money is spent effectively and helps deliver our plans for change.”