UK government borrowing figures show "double-edged sword" of inflation

(Alliance News) - Higher than expected UK government borrowing figures suggest there will be challenges in store for the UK's Chancellor of the Exchequer, Jeremy Hunt, in the run up to March's budget.

The Office for National Statistics on Thursday said public sector net borrowing stood at GBP14.3 billion in November, reflecting the fourth-highest November total since monthly records began in 1993. Economists had forecast borrowing of GBP13.1 billion for the month.

The ONS also revealed that borrowing for October was GBP3.8 billion greater than it had previously estimated.

"In recent months we have seen large increases in benefit payments largely because of inflation-linked benefits uprating and cost-of-living payments," the ONS commented.

At the beginning of the fiscal year in April, the Department for Work & Pensions increased inflation-linked benefits and tax credits, as well as pensions, in line with the prior September's inflation rate of 11.1%.

As AJ Bell's head of financial analysis, Danni Hewson, explained, inflation has been a "double-edged sword" for UK public sector finances.

"On the one hand frozen thresholds combined with inflation busting pay increases and increased [value-added tax] as the cost of goods has shot up have helped increase the tax take by almost GBP3 billion compared to the same period last year," she noted.

However, Hewson also noted that the income has been swallowed by the uprating of benefits to pay for wage increases, as well as rising bills on servicing the debt amid higher interest rates. This meant the UK government needed to borrow more money to balance the books.

"Even with the end of those energy support schemes the government was forced to forage through the branches of the much-denuded magic money tree, and though borrowing was down on the same period last year, debt has jumped 1.8% higher to come in at 97.5% of GDP," the AJ Bell analyst continued.

However, Wednesday's cooler-than-expected inflation print, which showed the headline annual rate dropping below 4% in November, provides some reason for optimism. The market rushed to price in at least two 25 basis point rate cuts next year, meaning the government could be provided with more fiscal headroom.

"In an ideal world growth would enable the country to pay down the debt whilst improving public services and cutting taxes. But meaningful growth has proved elusive which suggests tough decisions are ahead for this chancellor or the next," Hewson warned.

By Elizabeth Winter, Alliance News deputy news editor

Comments and questions to [email protected]

Copyright 2023 Alliance News Ltd. All Rights Reserved