Energy Support Schemes Drive UK Government Borrowing to February Record

A household energy bill displayed on a mobile phone held next to a gas hob, in a file photo dated Aug. 25, 2022. (Yui Mok/PA Media)

The cost of the UK government’s energy support scheme caused public sector borrowing to soar to a record £16.7 billion last month, official figures show.

According to the Office for National Statistics (ONS), public sector net borrowing in February was £16.7 billion, £9.7 billion more than the same month a year ago and the highest February borrowing since monthly records began in 1993.

The ONS said the rise was largely driven by the £9.3 billion spending on energy support schemes.

The cost of the government’s energy support schemes—put in place last October to help households and businesses cope with rocketing gas and electricity bills following Russia’s invasion of Ukraine—has now reached about £34 billion.

In last week’s Spring Budget, Chancellor of the Exchequer Jeremy Hunt announced that the energy price guarantee capping bills at £2,500 a year will be extended for households for another three months, from April to June.

Inflation

According to ONS data, central government debt interest payable was £6.9 billion in February, £1.3 billion less than a year ago.

Of the £6.9 billion debt interest, £3.4 billion reflected the impact of retail prices index (RPI) inflation on index-linked gilt stock.

Inflation has been falling back from painful highs seen in October last year, but consumer prices index inflation still stands at 10.1 percent, with RPI at 13.4 percent.

Britain's Chancellor of the Exchequer Jeremy Hunt walks through spring flowers as he arrives to meet children and staff at Busy Bees Battersea Nursery in south London, on March 15, 2023, after delivering his Budget earlier in the day. (Stefan Rousseau/POOL/AFP via Getty Images)

In the financial year-to-February 2023, the public sector borrowed £132.2 billion, £15.5 billion more than in the same period last year and the third highest financial year-to-February borrowing since monthly records began in 1993.

Public sector net debt at the end of February was £2,507.3 billion—or around 99.2 percent of GDP—with the debt-to-GDP ratio at levels last seen in the early 1960s.

Commenting on the latest data, the chancellor said: “Borrowing is still high because we’re determined to support households and businesses with rising prices and are spending about £1,500 per household to pay just under half of people’s energy bills this winter.

“What will bring these costs right down is lower inflation, which is why it remains one of our top priorities to halve it this year, alongside growing our economy and reducing debt.”

Borrowing Forecast

The borrowing figures come after the UK’s fiscal watchdog, the Office for Budget Responsibility (OBR), cut its borrowing forecasts for the current financial year to £152.4 billion, down from its £177 billion previous estimation.

The OBR said last week that new measures in the Spring Budget—such as increased childcare commitments for working parents—will increase spending, but borrowing is still due to be, on average, £10 billion lower each year from next year onwards.

The ONS said the February figure leaves the government with £20.2 billion of headroom for borrowing in March.

Samuel Tombs at Pantheon Macroeconomics said the OBR’s updated forecast is therefore “not in serious danger of being breached.”

But he added, “We continue to think, however, that the OBR’s optimism about the medium-term economic outlook is misplaced and that the government will not stick to plans for a substantial fiscal consolidation over the coming years.”

Philip Shaw, an economist at Investec Economics, said the OBR’s updated borrowing forecast should be “easily achievable, despite the cost of the various energy support schemes and higher interest payments.”

“Moreover, it is possible that a new treatment of the way that student loans are accounted for will be introduced next month, which would lower this year’s deficit by a further £8.6 billion,” he said.

He added: “As things currently stand, borrowing should come down next year despite a period of economic weakness and a £22 billion tax giveaway, as previously announced tax increases (such as the 6p rise in corporation tax) kick in and as the current energy support measures are not repeated.

“The main political question is whether the deficit closes sufficiently to allow the chancellor a degree of tax largesse ahead of the next election. We suspect that somehow it will.”

Tax Burden

In the Spring Budget, Hunt resisted demands from Tory MPs, including former Prime Minister Boris Johnson, to scrap April’s increase in corporation tax.

He confirmed that the main rate of corporation tax will rise from 19 to 25 percent in April, taking it back to levels last seen in the early 2010s.

Corporation tax receipts are forecast to reach the equivalent of 3.7 percent of GDP by 2027/28, their highest level since the tax was introduced by Labour Chancellor of the Exchequer Jim Callaghan in 1965.

The move means the overall tax burden will continue to rise and hit a post-war high in four years’ time.

According to the OBR, the UK’s tax burden is on course to reach 37.7 percent of GDP in 2027–28, the highest since the Second World War and 4.7 percentage points above where it stood before the COVID-19 pandemic.

PA Media contributed to this report.