UK borrowing far exceeds expectations in December

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The British government borrowed far more than expected in December, underscoring the scale of the challenge facing Chancellor Rachel Reeves as she tries to restore confidence in her fiscal plans and turn around a stalled economy.

ONS data on Wednesday showed borrowing – the difference between public sector spending and income – was £17.8bn last month, £10.1bn more than in December 2023 and the third highest December on record high.

Borrowing in the first nine months of the financial year was £129.9bn, an increase of £8.9bn on the same period in the previous financial year and the second-highest level for the April-December period since monthly records began in January 1993.

The figures add to pressure on Reeves, who has been trying to reassure investors after Britain's borrowing costs climbed this month to their highest levels since the global financial crisis, threatening her ability to meet self-imposed fiscal rules where the Under the rules, day-to-day expenses are included in tax revenue.

Alex Kerr, economist at Capital Economics, said: “December's borrowing overshoot is further disappointing news for the chancellor, against a backdrop of slowing GDP growth and high interest rates.”

December's increase was largely due to higher interest payment costs on inflation-linked bonds and a one-time payment to buy back military accommodation.

The figure was higher than the 14.1 billion pounds expected by economists polled by Reuters and higher than the latest forecast of 14.6 billion pounds in October by the Office for Budget Responsibility, the UK's fiscal watchdog.

British borrowing costs have fallen since data last week showed inflation unexpectedly slowed in December and a global bond selloff eased.

Reeves promised a plan to turn around the economy. The economy grew just 0.1% in November after modest contractions in September and October, with businesses blaming Reeves' tax-increasing October budget for hurting confidence and hurting the labor market.

The OBR is required to make two forecasts each financial year and will provide an update on March 26 on whether Reeves can still meet her own borrowing rules.

With the budget giving Reeves just £9.9bn of wiggle room to meet her fiscal rules, Kerr said there was a growing risk the chancellor would need to cut spending or raise taxes, with her space already slashed to £2bn GBP.

After the December borrowing data was released, Darren Jones, chief secretary to the Treasury, said: “Economic stability is vital to our overarching mission to deliver growth, which is why our fiscal rules are non-negotiable and why we will firmly The reason for taking control is about public finances.”

Elliot Jordan-Dock, an economist at Pantheon Macroeconomics, said the OBR's forecasts remained “subject to significant upside risks”.

“We expect the government to outline plans for spending cuts (to take place before the end of the forecast year) at the next fiscal exercise in March. Further tax increases in the next budget in October are also a good bet,” he added.

After the data was released, the pound still fell 0.2% to $1.23. UK gilts were essentially flat, with the 10-year gilt yield at 4.59%.

Interest costs in December were £8.3bn, £3.8bn more than a year earlier and the third highest December figure on monthly records, a sign that rising inflation is putting pressure on public finances. Borrowings in December added to the £1.7bn available to buy back military housing.

Tax receipts for the month increased by £4 billion compared with December 2023, reaching £65.5 billion.

Public sector debt, or long-term accumulated borrowing, accounts for 97.2% of GDP, still at the level of the early 1960s.