In December, the UK experienced a significant increase in its budget deficit, largely attributed to interest payments. This surge poses considerable challenges for Chancellor Rachel Reeves, especially amid high borrowing costs and a sluggish economic environment.
According to the Office for National Statistics, public sector net borrowing jumped by £10.1 billion compared to the previous year, reaching a total of £17.8 billion for December. This represents the highest level of December borrowing in four years and exceeds the £14.6 billion forecast by the Office for Budget Responsibility. Economists had anticipated a shortfall of £13.7 billion for December. Additionally, borrowing to finance day-to-day public sector operations climbed by £7.3 billion to £10 billion, marking the largest December deficit in two years.
The data revealed that interest payments on central government debt amounted to £8.3 billion in December, surpassing the OBR's forecast of £7.8 billion by £0.5 billion.
Borrowing for the financial year up to December reached £129.9 billion, an increase of £8.9 billion from the same period in the previous financial year.
Despite most of the borrowing surge being driven by a one-time payment, the figures indicate the current budget deficit is on track to exceed the OBR's forecast for 2024/25 by £0.8 billion, according to Alex Kerr, an economist at Capital Economics.
Lately, UK government bond yields have risen as investors demand a higher risk premium to acquire UK assets, driven by growing concerns over inflation and fiscal stability.
