Energy Support and Debt Interest Send UK Public Borrowing to Record High

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt purchase sweets as they visit Accrington Market Hall, United Kingdom, on Jan. 19, 2023. (Christopher Furlong/Getty Images)

The UK’s public borrowing rose to another record high last month as a result of the mounting cost of the government’s energy support schemes and soaring debt interest.

According to the latest figures released by the Office for National Statistics (ONS), UK public sector borrowing reached £27.4 billion in December 2022, the highest December figure since monthly records began in January 1993.

The figure was £16.7 billion more than the same month a year earlier, largely driven by a sharp rise in spending on energy support schemes and an increase in debt interest.

To protect British households against high energy prices exacerbated by the Russian invasion of Ukraine, the UK government launched the Energy Bills Support Scheme, which is paying out £400 to households over a six-month period, and the Energy Price Guarantee, which has capped annual energy costs to £2,500 for a typical household.

The schemes cost nearly £7 billion in December, with the ONS estimating the government spent £5 billion on its energy price guarantee and a further £1.9 billion on power bill support payments.

Meanwhile, interest payments on government debt jumped from £8.7 billion to £17.3 billion year-on-year, the highest December figure since monthly records began. The ONS said the increase in interest payments is largely because of the effect of Retail Prices Index changes on index-linked gilts.

In the financial year to December, the government’s debt interest bill jumped to £87.8 billion and Britain’s fiscal watchdog, the Office for Budget Responsibility (OBR), is estimating it will rise to £115.7 billion by the end of the full year in March.

‘Tough Decisions’

Commenting on the new borrowing figures, Chancellor of the Exchequer Jeremy Hunt said the government is making “tough decisions to get debt falling.”

He said: “Right now we are helping millions of families with the cost of living, but we must also ensure that our level of debt is fair for future generations.

“We have already taken some tough decisions to get debt falling, and it is vital that we stick to this plan so we can halve inflation this year and get growth going again—creating better paid jobs across the country.”

But the opposition Liberal Democrats blamed the situation on the Conservative government’s economic management.

Lib Dem Treasury spokeswoman Sarah Olney said: “A toxic combination of Conservative incompetence and reckless decision-making at the top of government have blown a hole in the country’s finances, and now ministers are making British families pay for it.

“A long-list of Conservative chancellors have hiked taxes, added hundreds of pounds a month to mortgages and left the country with unnecessarily high borrowing costs.”

Positive Signs

The ONS said public sector debt reached £2.5 trillion at the end of December 2022, or around 99.5 percent of gross domestic product—a level last seen in the early 1960s.

December’s figure took borrowing so far in the financial year to £128.1 billion, £5.1 billion more than that borrowed in the same period last year.

Borrowing will strike around £177 billion for the full 2022/23 year, the OBR has predicted.

But some experts said that the pressure on the UK’s public finances will ease.

According to Samuel Tombs at Pantheon Macroeconomics, falling energy wholesale prices are set to make the government’s energy bill guarantee less expensive.

With inflation easing back from a recent peak and interest rates soon to stop rising, debt interest payments should also begin to fall back, he added.

Martin Beck at the EY Item Club said: “The substantial fall in energy futures prices over the past few weeks is unlikely to make much difference to the government finances over the remaining three months of this fiscal year.

“However, if sustained, it appears likely to ensure that borrowing is significantly lower than the £140 billion that the OBR expects for 2023/2024.”

Jonathan Brearley, head of the UK’s energy regulator Ofgem, said on Monday that the energy price cap might drop below the £3,000 mark as early as April, saving the government billions of pounds in energy support costs.

Tax Debate

There has been ongoing debate within the ruling Conservative Party on how to develop the economy and improve public finances.

Last week, Tory MPs aligned with former Prime Minister Liz Truss’s tax-cutting agenda met for the first time as part of the “Conservative Growth Group.”

In a Daily Mail article, former Tory leader Sir Iain Duncan Smith argued the country is “already over-taxed and it is quite clear we cannot tax ourselves out of a recession.”

But Prime Minister Rishi Sunak insisted he does want to reduce taxation but argued the COVID-19 pandemic and Russia’s war in Ukraine mean he cannot do so yet.

On a visit to Lancashire on Jan. 19, he said: “We had a massive pandemic for two years, we had to shut the country down, do a bunch of extraordinary things that didn’t come cheap. Now we’ve got this war going on which is having an enormous impact on inflation and interest rates.”

Sunak said it “takes a bit of work” to get the state of the public finances to “where it needs to be.”

PA Media contributed to this report.