Wall Street Times

Government borrowing rises due to debt costs

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In December, the government borrowing peaked at an all-time high. This was caused by the cost of helping people pay their energy bills and the rising cost of interest on the debt.

The difference between what was spent and what was brought in by taxes was £27.4bn, which was the most for December since records began in 1993.

Interest on government borrowinghit £17.3 billion, more than doubling in a year.

According to the Office for National Statistics (ONS), the main reason for the rise in government borrowing was inflation.

Even though gas prices have started to go down, the average UK energy bill is still almost twice what it was before Russia invaded Ukraine.

This winter, the government cut energy bills by £400 for people in England, Scotland, and Wales. This was done to help people out.

It also started the Energy Price Guarantee program, which caps the average annual bills of a household at £2,500.

It comes at a time when price inflation is at its highest level in 40 years, putting pressure on millions of households.

A chief economist at the ONS, Grant Fitzner, told the BBC that the cost of helping people pay their energy bills had added about £7bn to the December’s government borrowing numbers.

He also said that the interest on UK gilts, or bonds, which the government sells 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 in line with the Retail Prices Index, which is currently at double-digit levels.

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 worsens the situation

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 quickly.”

She said that the amount of money borrowed was much higher than what economists had predicted, that interest payments on debt were “eye-watering,” that government spending was high, and that there were “pressures from the weakening economy.”

To get the government’s finances back on track, Chancellor Jeremy Hunt says he will have to make “eye-watering” cuts to public spending.

He has also had to go back on many of the tax cuts that his predecessor, Liz Truss, promised but needed more money. This is because her plans caused panic in the financial markets.

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 choices to get the debt to go down” as it tries to cut inflation in half and boost economic growth.

“Swung around a corner,”

The ONS said that the total debt of the public sector reached £2.5 trillion at the end of December, which is about 99.5% of the UK’s gross domestic product (GDP). This is a level that hasn’t been seen since the early 1960s.

As of the end of March, the total amount borrowed was £128.1 billion, which is £5.1 billion more than last year.

Andrew Bailey, the governor of the Bank of England, said last week that inflation might have turned a corner because it went down in November and December. He also said inflation is “likely to fall quickly” this year because energy prices are decreasing.

But Mr. Bailey also warned that if there were a lot of job openings, employees would be in a strong position to ask for pay raises, which could slow down the rate at which inflation fell.

At 10.5%, the rate of price increases each year is more than five times faster than the Bank’s current goal of 2%.

The ONS says that government borrowing would have been lower if not for energy support schemes and higher interest rates on debt.

This raises an interesting question: why does the government pay more interest on its debt based on the Retail Prices Index (RPI), which is a flawed measure of inflation?

It’s always higher than the Consumer Prices Index, the official measure that the Bank of England looks at.

The surprising answer is that the government doesn’t try to find the lowest interest rate it can like you or I would.

Instead, it is issuing “gilts,” also known as bonds, for big investors like private pension funds, whose payouts to customers are tied to RPI and therefore need an asset.

This is just one reason the government borrowing is different from borrowing by a household or business.

Prices are going up in the UK, but not as quickly as they used to. For example, in the year leading up to December, prices went up by 10.5%.

Prices went up by 11.1% in October. In November, prices went up by 10.7%.

In November, the Bank said inflation would drop to 5.2% by the end of 2023, and Mr. Bailey didn’t change his mind. Next month, the Bank is going to put out new predictions.

Read Also: Debt limit: What happens if the US defaults?

During the Covid pandemic, Mr. Bailey said, the economy “went off a cliff.” He said that it has partially recovered, but pay raises have not kept up with price increases, which are still close to a 40-year high.

He said it is still likely that the UK will go into a long, mild recession.