Government borrowing rose by less than expected last month, despite spending billions extra on an energy price cap and facing its first loss from the Bank of England’s bond-buying scheme.
Official figures showed total government borrowing rose to £13.5bn in October, short of economists’ forecasts of £22bn and down from £19bn in September. The figures are still £4.4 billion higher than the total borrowings of £9.3 billion in the same month a year earlier.
The government collected £70.2bn in tax revenue, up 6.3 per cent on October 2021, on the back of rising income tax and social security contributions and a 50 per cent rise in business tax revenue.
The Office for National Statistics said October was the first month on record that the government had covered losses from the central bank’s £800m quantitative easing programme. The Treasury compensates the bank for losses incurred on its £836bn stock of government debt. Rising interest rates mean that the bank loses on its gold holdings by paying a higher amount to commercial banks from the reserves than it gains on its bond holdings.
The Office for Budget Responsibility warned last week that the Treasury would need to raise £133bn over the next six years to cover losses from QE, reversing more than a decade of gains made by the stimulus programme.
Borrowing rose by around £3bn last month, with the government introducing a household energy price cap that will freeze average bills of around £2,500 until April and a similar freeze for businesses. The cap will cost around £25bn over the next six months, according to the OBR, but could become more expensive if the market price of gas rises. The ONS said the government’s debt interest bill reached £6.1bn last month. The interest cost of debt has doubled in the past year to £120 billion as higher interest rates have put pressure on government finances.
Last week, the OBR warned that the interest bill would be the biggest single cause of fiscal contraction in the coming years, with government spending to service its bonds outstripping spending on the health service.
Higher spending on welfare, pensions and debt growth, combined with falling tax revenues due to a slowing economy, will increase government borrowing by around £60bn a year, according to the OBR.
Jeremy Hunt said it was “right that the Government increased borrowing to support millions of businesses and families through the pandemic and the aftershocks of Putin’s illegal invasion of Ukraine”.
The Chancellor added: “To deal with inflation and ensure the economic stability needed for long-term growth, it is important that we put the public finances back on a more sustainable path.” There is no easy way to balance the nation’s books, but we have taken the necessary decisions to bring debt down while taking proactive steps to protect jobs, public services and the most vulnerable.”
Last week Hunt announced two new fiscal rules to help restore credibility to the UK market. The government wants to bring down total debt relative to GDP from 2027-28 and limit the deficit to below 3 percent of GDP in the same year.
Analysts at Citi had expected borrowing to reach £29bn last month and said the figures should help total borrowing this year fall short of the OBR’s forecast of £177bn.
Ruth Gregory, of the consultancy Capital Economics, said the increase in borrowing would “only encourage the chancellor to manage the public finances”.
In particular, the government may have to pay the bank more than £30bn next year and also in 2024 to cover losses on its quantitative easing programme, according to a report released by the central bank yesterday.