UK government borrowing hits £13.5bn as energy support programme kicks in

UK government borrowing surged to £13.5 billion in October as the support programme to help households with energy bills started. The figure was the fourth highest for October on record and was £4.4 billion more than in the same month last year, according to the Office for National Statistics (ONS). However, the reading was significantly lower than the £21 billion economists had predicted for the month. Total public sector spending hit £91.2 billion in October after central government spending rose by £6.5 billion to £76.8 billion for the month. This included about £3 billion on the cost of energy support initiatives alone, according to ONS estimates, of which £1.9 billion for the £400 home energy discount payments was part of. Samuel Tombs, an analyst at Pantheon Macro, said the high reading “largely is a consequence of the government's decision to shield households from most of the surge in energy prices”. Reacting to the figures, Jeremy Hunt, the Chancellor of the Exchequer, insisted “it is right the government increased borrowing to support millions of businesses and families throughout the pandemic” and the aftershocks of Russia’s invasion of Ukraine. In his autumn statement last week, Mr Hunt announced that the UK was in a recession. A report by the Organisation for Economic Co-operation and Development predicted that Britain would be the G7 nation to suffer most due to the energy crisis. A GDP contraction of 0.4 per cent in 2023 will follow on from a consumer price inflation will peak at around 10 per cent in late 2022 due to high energy prices and continuing labour and goods supply shortages, the body said. It was critical of the government intervention to support households and businesses hit by high energy prices. "The untargeted Energy Price Guarantee announced in September 2022 by the government will increase pressure on already high inflation in the short term, requiring monetary policy to tighten more and raising debt service costs," it said. "Better targeting of measures to cushion the impact of high energy prices would lower the budgetary cost, better-preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation." To tackle soaring inflation, which has jumped to a 41-year high of 11.1 per cent, and ensure the economic stability needed for long-term growth, it is vital that public finances are put back on “a more sustainable path”, Mr Hunt said. “There is no easy path to balancing the nation’s books but we have taken the necessary decisions to get debt falling while actively, taking steps to protect jobs, public services and the most vulnerable,” he said. Mr Hunt was appointed to No 11 Downing Street by Liz Truss in October after his predecessor Kwasi Kwarteng’s disastrous mini-budget wreaked havoc on financial markets and caused the pound to sink to a 37-year low. He immediately set about on a damage control mission, scrapping almost all of the measures laid out by Mr Kwarteng. The energy support initiative unveiled by Ms Truss still went ahead but Mr Hunt recently announced it would end earlier than expected, after March 31, 2023. Meanwhile, public sector receipts — money gained from the public sector, largely through taxes — were £77.6 billion for October. The Conservative government also felt the impact of continued increases in the interest payments paid by the state on its debt, after a series of interest rate increases by the Bank of England and rises in inflation. The central bank earlier this month unveiled its largest rise in interest rates in more than three decades in a bid to tame inflation. The base rate was raised by 0.75 percentage points to 3 per cent. In October, the interest payable on central government debt hit £6.1 billion, including £3.3 billion from debt interest payments linked to Retail Prices Index (RPI) inflation. The figures from the ONS were published after the Office for Budget Responsibility (OBR) said government borrowing for the year was set to be higher than it originally forecast in March. It predicted that the public sector would borrow £177 billion by the end of the financial year, which would be the second highest figure since 1994. Higher interest rates mean that the cost of servicing government debt will double to more than £120 million next year and make public finances “more vulnerable to future shocks”, OBR estimates indicated last week. The recession the UK is in will last “just over a year”, according to the OBR. Martin Beck, chief economic adviser to the EY Item Club, said: “Given that last week’s OBR forecast was based on relatively high assumptions for interest rates and gilt yields, the EY Item Club thinks it is quite possible that the public finances will perform better than the OBR anticipates. “This could mean that the government is able to pare back some of the fiscal tightening that is currently planned for 2025 and 2026 and beyond.”