UK Government Borrowing Rises as Energy Support Scheme Begins

The Chancellor of the Exchequer, Jeremy Hunt, delivers his autumn statement in the House of Commons in London on Nov. 17, 2022. (Jessica Taylor/UK Parliament via PA)

The UK’s government borrowing increased in October as the energy support scheme for households and businesses got under way.

According to data released by the Office for National Statistics (ONS) on Nov. 22, government borrowing rose to £13.5 billion ($16 billion) in October.

The figure was £4.4 billion ($5.2 billion) higher than the same month last year and was the fourth-highest figure for October since monthly records began in 1993, the ONS said.

The higher borrowing figure was in part caused by the government’s energy support schemes to households and to domestic energy suppliers, which pushed central government current spending to £76.8 billion ($91 billion), £6.5 billion ($7.7 billion) more than the same month last year.

Central government tax receipts for October were £51.7 billion ($61.3 billion), £2.5 billion ($2.96 billion) more than a year ago.

The government also felt the impact of continued increases in the interest payments paid by the state on its debt, after a raft of interest hikes by the Bank of England and rises in inflation.

In October, the interest payable on central government debt hit £6.1 billion ($7.2 billion), including £3.3 billion ($3.9 billion) from debt interest payments.

Energy Support

The average annual household energy has been frozen at £2,500 ($2,960) from Oct. 1 under the energy price guarantee introduced by former Prime Minister Liz Truss.

The cap, limiting the price companies can charge customers per unit of energy they use, was to have lasted for two years from Oct. 1.

But after Jeremy Hunt replaced Kwasi Kwarteng as chancellor of the Exchequer, he announced that it would end at its current level after six months, after which more targeted help would be provided to the most vulnerable.

In his autumn budget, unveiled on Nov. 17, he announced that the energy price guarantee will continue for a further 12 months from April, but will rise from the current £2,500 to £3,000 ($3,500) per year for the average household.

This will coincide with the £67 ($80) monthly payments that make up the government’s £400 ($474) rebate to all households to offset higher energy bills ending from March.

Hunt said that with prices forecast to remain “elevated” through next year, this would still mean an average of £500 ($592) support for every household.

Balancing Act

Commenting on the October borrowing figure, Hunt said the government has had to balance the need to support households and businesses and to control public sector debt.

He said: “It is right that the government increased borrowing to support millions of business and families throughout the pandemic and the aftershocks of [Russian President Vladimir] Putin’s illegal invasion of Ukraine.

“But to tackle inflation and ensure the economic stability needed for long-term growth, it is vital that we put the public finances back on a more sustainable path.

“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.”

Hunt’s autumn budget marked a massive change of direction from Truss’s government, which had promised, in its mini-budget, massive tax cuts.

Hunt announced £55 billion ($65 billion) of funding cuts and a “substantial tax increase,” saying that tax as a percentage of GDP would increase by 1 percent over the next five years.

He said he intended to protect the most vulnerable in society and make the wealthy bear more of the tax burden.

Hunt lowered the threshold for the top rate of income tax—45 percent—from £150,000 ($178,000) to £125,140 ($148,370).

He also extended the freeze on income tax personal allowance, higher rate threshold, main national insurance thresholds, and the inheritance tax thresholds by two years until 2028, meaning more taxpayers would be captured as their income rises with inflation.

Debt Interest Payment

The Office for Budget Responsibility (OBR) said on Nov. 17 that higher interest rates mean that the cost of servicing government debt will double to over £120 million ($142 million) next year and make public finances “more vulnerable to future shocks.”

It confirmed that Britain was officially in recession and that the previous eight years’ growth would be wiped out.

The OBR, in its assessment of the UK economy, said: “Rising prices erode real wages and reduce living standards by seven percent in total over the two financial years to 2023–24 (wiping out the previous eight years’ growth), despite over £100 billion of additional government support.”

It added: “The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of two percent.”

The OBR also predicted unemployment would rise by 505,000 to 4.9 percent in the third quarter of 2024.

But Martin Beck, chief economic adviser to the EY Item Club, said the OBR forecast was “based on relatively high assumptions for interest rates and gilt yields.”

He said 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 2025–2026 and beyond.”

Chris Summers, Lily Zhou, and PA Media contributed to this report.