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The UK government borrowing peaked more than ever before in December. This happened because it cost money to help people pay their energy bills, and the interest on the debt was going up.
The difference between what was spent and what was brought in by taxes was £27.4 billion, which was the most for December since records began in 1993.
Interest on government borriwng reached £17.3 billion, more than double what it was a year ago.
According to the Office for National Statistics (ONS), the main reason for the rise in borrowing was inflation.
Even though gas prices are starting to go down, the average UK energy bill is still almost twice what it was before Russia invaded Ukraine.
People in England, Scotland, and Wales had their energy bills cut by £400 this winter. People needed help, so this was done.
It also started the Energy Price Guarantee program, caps a household’s annual energy bills at £2,500 on average.
It comes at a time when prices are rising at the fastest rate in 40 years, which is hard on millions of households.
Grant Fitzner, the chief economist at the ONS, told the BBC that helping people pay their energy bills added about £7bn to the amount of money borrowed in December.
He also said that the interest on UK gilts, which the government sells bonds to international investors to get the money it needs, has gone up sharply. This is because many gilts are “index-linked,” which means that the government’s payments go up along with the Retail Prices Index, which is currently in the double digits.
He said that it was likely that the government would borrow less once the energy support programs were no longer needed and inflation, which is thought to have reached its peak, finally went down.
Government borrowing dragged down the economy
But Ruth Gregory, a senior UK economist at Capital Economics, said that the government borrowing numbers “showed that the government’s finances are getting worse fast.”
She said that the amount of money borrowed was much higher than what economists had predicted, that interest payments were “eye-watering,” that government spending was high, and that there were “pressures from the weakening economy.”
Chancellor Jeremy Hunt says he will have to make “eye-watering” cuts to public spending to get the government’s finances back on track.
He has also had to go back on many of the tax cuts that his predecessor, Liz Truss, promised because he needed more money. This is because her plans sent the stock markets into a panic.
Mr. Hunt said, “The government is helping millions of families with the cost of living, but we also need to ensure that our debt level is fair for future generations.”
He also said that the government has “already made some hard decisions to get the debt to go down” as it tries to cut inflation in half and boost economic growth.
“A sharp turn,”
At the end of December, the ONS said that the public sector’s total government borrowing had reached £2.5 trillion, about 99.5% of the UK’s gross domestic product (GDP). This level hasn’t been seen since the early 1960s.
As of the end of March, £128.1 billion had been borrowed, which is £5.1 billion more than last year.
Andrew Bailey, the head of the Bank of England, said last week that the fact that inflation went down in November and December might mean that it has turned a corner. He also said that this year’s inflation is “likely to fall quickly” because energy prices are decreasing.
But Mr. Bailey also said that if there were a lot of job openings, employees would be in a good position to ask for pay raises, which could slow the rate at which inflation fell.
At 10.5%, the annual rate of price increases is more than five times faster than the Bank’s current goal of 2%.
The ONS says that borrowing would have been less if energy support programs and higher interest rates on debt hadn’t been in place.
This raises an interesting question: why does the government pay more interest on its debt based on the flawed Retail Prices Index (RPI)?
It’s always higher than the official measure that the Bank of England looks at, the Consumer Prices Index.
The surprising answer is that the government does not try to find the lowest interest rate it can like you or I would.
Instead, it is issuing “gilts,” bonds, for big investors like private pension funds, whose payouts to customers are tied to the RPI and therefore need an asset.
This is just one reason why government borrowing is different from borrowing by a person or business.
In the UK, prices are rising, but they used to be slower. For example, prices increased by 10.5% in the year before December.
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In October, prices went up by 11.1%. Prices went up by 10.7% in November.
In November, the Bank said inflation would drop to 5.2% by the end of 2023, and Mr. Bailey didn’t change his mind. The Bank will make new predictions next month.
Mr. Bailey said that when the Covid virus spread, the economy “fell off a cliff.” He said it has partially recovered, but pay raises have yet to keep up with price increases, which are still close to a 40-year high.
He said the UK is likely to have a long, mild recession.