UK budget deficit soars with cost of debt and energy support

UK government borrowing surged in November as the public finances came under mounting pressure from rising debt-interest payments and the huge cost of subsidising energy bills for consumers and businesses.

The budget deficit stood at £22 billion (€25.2 billion) — the highest monthly total in records stretching back to 1993 and almost triple the £8.1 billion reading a year ago, the Office for National Statistics (ONS) said on Wednesday. Economists had forecast a shortfall of £14.8 billion.

The figures leave British prime minister Rishi Sunak’s government little room for manoeuvre in settling strikes that have upended transport and the National Health Service in the lead-up to the Christmas holiday. Railway workers, ambulance drivers and nurses are among those that are set to walk off the job to press their case for higher pay, something ministers maintain would fan inflation.

Climbing deficit

Until recently, borrowing had been on a downward trend as the recovery from the pandemic boosted tax receipts and reduced Covid-related spending. The improvement has now gone into reverse, however, with budget officials predicting 2022-23 as a whole will mark the second-highest deficit in a decade.

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Chancellor of the exchequer Jeremy Hunt blamed Russia’s attack on Ukraine for the jump in the cost of energy.

“We have taken significant action to support millions of businesses and families here in the UK, said Mr Hunt. “We have a clear plan to help halve inflation next year, but that requires some tough decisions to put our public finances back on a sustainable footing.”

The rise in borrowing was driven by the massive surge in spending on household energy support and debt interest. The combined cost of all the energy support programmes, including the price cap, was about £7 billion for the month of November alone.

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The shortfall in the first eight months of the fiscal year climbed to £105 billion, the fourth highest on record. The Office for Budget Responsibility (OBR) expects the total to reach £177 billion for the full 12 months. At more than 7.1 per cent of GDP [gross domestic product], that would represent the biggest fiscal gap since 2012-13, leaving aside the pandemic when the deficit hit a peacetime high.

The deterioration reflects the toll being taken by sky-high energy prices and the worst bout of inflation in four decades. The damage to the public finances is forecast to persist, with government debt expected to spend the coming years above 100 per cent of GDP despite the £55 billion of tax rises and spending cuts announced by Hunt last month.

Supporting consumers

Key measures driving the deficit include debt-interest payments that totalled £7.3 billion in November compared with £2.4 billion a year earlier. It was the highest November figure since records began in 1997. Next month is set to be even higher due to a jump in the retail price index of inflation, which is linked to some gilt payments. The OBR expects debt servicing costs to total £120 billion this year, double what’s spent on defence.

Of the total spent on supporting consumers and businesses with energy bills, £1.9 billion was a direct cost-of-living transfer to households, and roughly £5 billion was the cost of subsidizing bills through the energy price cap, the ONS said.

A £2 billion loss of revenue for November was due to a government decision to reverse an increase in National Insurance Contributions that come from worker payrolls. The total giveaway in 2022-23 is forecast at more than £6 billion. — Bloomberg