The latest UK borrowing figures, reveal a significant increase in public sector net borrowing. In December 2024, the UK government borrowed £17.8 billion, which is the highest figure for the month for four years.
This amount was reportedly £10.1 billion higher than the same month last year and exceeded the £14.1 billion forecast by most economists.
The reported rise in borrowing was driven by several factors, including increased spending on public services, benefits, debt interest, and capital transfers. The interest payable on central government debt alone was £8.3 billion, nearly £4 billion higher than the previous year.
Additionally, a reduction in National Insurance contributions following rate cuts earlier in 2024 partially offset the increase in tax receipts.
Chancellor Rachel Reeves faces a challenging fiscal environment, with borrowing costs rising due to lower economic growth, higher public sector wages, and increased benefits payments. The unexpected jump in December 2024’s borrowing highlights the difficulties in balancing the budget and maintaining economic stability. The Chancellor’s budget was one of growth, but employer NI hikes have unravelled her ‘growth’ plan.
Despite the rise in borrowing, government bond prices remained relatively stable, suggesting that traders were not overly concerned by the surge. However, the overall fiscal position remains precarious, with public sector net debt estimated at 97.2% of GDP, the highest level since the early 1960s.
The government has pledged to take a hard line on unnecessary spending and to ensure that every penny of taxpayer money is spent productively.
As the fiscal year progresses, the Chancellor will need to navigate these financial challenges carefully to maintain economic stability and growth.
However, it is anticipated next month, following the January tax income boost, figures will appear favourable for the government, albeit temporarily.
The pound has continued to fall after UK government borrowing costs rose and concerns grew about public finances
Sterling dropped as UK 10-year borrowing costs surged to their highest level since the 2008 financial crisis when bank borrowing virtually ground to a halt.
Economists have warned the rising costs could lead to further tax rises or cuts to spending plans as the government tries to meet its self-imposed borrowing target.
The UK government creates its own financial crisis as it messes up its ‘go for growth’ policy
The UK economy is currently grappling with a series of financial challenges that have led to a significant fall in the value of the pound, soaring treasury yields, and high borrowing costs.
These developments have been largely influenced by the recent budget announced by Chancellor Rachel Reeves, which has sparked concerns among investors and economists alike.
Downward trajectory
The pound has been on a downward trajectory, recently hitting its lowest level since November 2023. Traders are betting on further declines, with some predicting the pound could fall as low as $1.12
This decline is partly due to the rising cost of government borrowing, which has surged to levels not seen since the 2008 financial crisis. The yield on 10-year gilts has climbed to 4.8%, while the yield on 30-year gilts has reached 5.34%, the highest in 27 years.
Recent UK budget
The recent budget has played a crucial role in these developments. Announced in October 2024, the budget included significant tax hikes and increased spending, leading to a substantial rise in government borrowing.
The budget deficit is expected to reach 4.5% of GDP this fiscal year, pushing the overall government debt close to 100% of GDP. This increase in borrowing has led to a higher supply of government debt, which in turn has driven down the price of bonds and pushed up yields.
Higher yields
Higher yields mean that the government has to pay more to borrow money, which has significant implications for its fiscal policy. The rising cost of servicing government debt could force the government to either raise taxes further or cut spending to meet its fiscal rules.
This situation is reminiscent of the market turmoil following Liz Truss’s mini budget in 2022, which also led to a sharp rise in borrowing costs and a fall in the value of the pound.
The impact of these developments extends beyond the government. Higher borrowing costs are likely to affect households and businesses as well.
Economic growth at risk
Mortgage rates, which are influenced by government bond yields, are expected to remain high, putting additional pressure on homeowners. Businesses, on the other hand, may face higher costs of borrowing, which could lead to reduced investment and slower economic growth.
The UK is facing a challenging economic environment characterized by a falling pound, high treasury yields, and rising borrowing costs.
The recent budget has exacerbated these issues, leading to increased government borrowing and higher debt levels. As the government navigates these challenges, it will need to carefully balance its fiscal policies to avoid further economic instability and ensure sustainable growth and not more ‘unfunded’ debt.
As of September 2024, the UK’s national debt stands at £2,685.6 billion, which is approximately 100% of the country’s GDP. This is the highest level of public sector debt since 1961.
UK debt and its borrowing
As of 2024, the United Kingdom’s national debt has reached a staggering £2,685.6 billion, an amount equivalent to the nation’s GDP. This surge in debt, driven by persistent borrowing, has sparked significant economic and political debate.
Historical context
The UK’s debt levels have fluctuated over time, influenced by wars, recessions, and policy decisions. However, the current debt level marks a significant peak not seen since the early 1960s.
The Financial Crisis of 2008 saw the debt-to-GDP ratio rise sharply as the government borrowed heavily to stabilize the banking sector and stimulate the economy. More recently, the COVID-19 pandemic necessitated extensive government borrowing to fund health services, furlough schemes, and business support measures, exacerbating the debt situation.
Government borrowing
Government borrowing, or public sector net borrowing, is the amount by which government expenditures exceed its revenues. This borrowing is essential for funding various public services, infrastructure projects, and welfare programs.
While borrowing can be a tool for stimulating economic growth, especially during downturns, it also raises concerns about fiscal sustainability and the burden on future generations.
Economic Implications
High levels of national debt can have profound economic implications. On the one hand, government spending can stimulate economic activity, create jobs, and drive growth. However, excessive borrowing can lead to increased interest payments, diverting resources from essential services like healthcare and education.
Additionally, high debt levels can reduce investor confidence, potentially leading to higher borrowing costs for the government and businesses.
Debt management strategies
The UK government employs various strategies to manage its debt. These include issuing government bonds to investors, which provide a relatively low-cost means of borrowing. The Bank of England also plays a crucial role, particularly through its monetary policies, such as setting interest rates and implementing quantitative easing programs.
The government’s fiscal policy, which includes tax and spending measures, is another key component in managing the debt.
The future
Looking ahead, the UK’s debt trajectory will depend on several factors, including economic growth rates, government policy decisions, and global economic conditions.
While reducing the debt burden is a priority, balancing fiscal responsibility with the need for economic stimulus remains a delicate act. Policymakers must navigate this complex landscape to ensure long-term economic stability and prosperity for future generations.
UK debt in direct relation to UK GDP from 1980 – 2024
Since the 1950s, UK debt has gone through several cycles. Post-World War II, debt was high due to reconstruction efforts.
The 1980s saw a decline in debt, thanks to privatisation and reduced public spending. However, the 2008 financial crisis caused a sharp increase, followed by more borrowing during the COVID-19 pandemic, reaching 100% of GDP in 2024.
UK public sector borrowing
Public sector debt as a proportion of GDP
How does the UK government borrow money?
The government raises funds by issuing financial instruments known as bonds. A bond represents a commitment to repay borrowed money in the future, typically with periodic interest payments until maturity.
UK government bonds, or ‘gilts’ are generally regarded as secure investments, carrying minimal risk of non-repayment. Institutions both within the UK and internationally, including pension funds, investment funds, banks, and insurance companies, are the primary purchasers of gilts.
Additionally, the Bank of England has purchased substantial amounts of government bonds in the past as an economic stimulus measure through a mechanism known as ‘quantitative easing’.
How much is the UK government borrowing?
The government’s borrowing fluctuates monthly. For example, in January, when tax returns are filed, there’s typically a surge in revenue as many pay a significant portion of their taxes at once. Therefore, it’s more informative to consider annual or year-to-date figures.
In the financial year ending March 2024, the government borrowed £121.9 billion. The latest data for September 2024 indicates borrowing at £16.6 billion, up by £2.1 billion compared to September 2023.
The national debt refers to the total amount owed by the government, which stands at approximately £2.8 trillion. This figure is comparable to the gross domestic product (GDP) of the UK, which is the total value of goods and services produced in the country annually.
The current debt level has more than doubled since the period from the 1980s up to the 2008 financial crisis. Factors such as the financial crash and the Covid pandemic have escalated the UK’s debt from its historical lows to where it is now.
However, when considering the economy’s size, the UK’s debt is relatively low compared to much of the previous century and to that of other major economies.
How much money does the UK government pay in interest?
As the national debt increases, so does the interest that the government must pay. This additional cost was manageable when interest rates were low throughout the 2010s, but it became more burdensome after the Bank of England increased interest rates.
The government’s interest payments on the national debt are variable and reached a 20-year peak in early October 2023. Approximately a quarter of the UK’s debt is tied to inflation, meaning that payments increase with rising inflation.
This situation led to a significant rise in the cost of debt service, though these payments have begun to decrease. If the government allocates more funds to debt repayment, it could result in reduced spending on public services, which were the original reason for the borrowing.
In conclusion, while the UK’s debt and borrowing levels present challenges, strategic management and informed policy decisions will be crucial in navigating the path forward.
The UK debt total vs GDP is now as of 2024 all but 100%
House prices have ended the year 1.8% lower in the UK, according to Nationwide Building Society
The Nationwide forecasts no growth or a further fall in 2024.
The lender said the average house price across the UK was £257,443 in December 2023. This was flat compared to November 2023 but down compared to December 2022.
The lender reportedly said that consumer confidence ‘remains weak’, despite some mortgage rates falling in anticipation for Bank of England (BoE) to cut borrowing costs in the months ahead.
The number of housing transactions has been running at around 10% below pre-Covid levels, Nationwide reported. The fall was more pronounced for those buying a house using a mortgage – down 20% compared to before the pandemic.
However, the volume of cash deals continues to run above the levels recorded before Covid hit.
The interest the government pays on national debt has reached a 20-year high as the rate on 30-year bonds touches 5.05%.
A rise in the cost of borrowing comes at a difficult time for the chancellor, Jeremy Hunt, as he prepares for the autumn statement on 22nd November 2023. The chancellor has already made clear that tax cuts will not be announced in the autumn statement.
National debt £2,590,000,000,000
The total amount the UK government owes is called the national debt and it is currently about £2.59 trillion – £2,590,000,000,000.
The government borrows money by selling financial products called bonds. A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments over the bond’s lifetime.
UK government bonds – known as ‘gilts’ – are normally considered very safe, with little risk the money will not be repaid. Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.
QE
The Bank of England (BoE) has also bought hundreds of billions of pounds’ worth of government bonds in the past to support the economy, through a process called quantitative easing or QE.
A higher rate of interest on government debt will mean the chancellor will have to set aside more cash, to the tune of £23 billion to meet interest payments to the owners of bonds. This in-turn means the UK government may choose to spend less money on public services like healthcare and schools at a time when workers in key industries are demanding pay rises to match the cost of living.
Double debt
The current level of debt is more than double what was seen from the 1980s through to the financial crisis of 2008. The combination of the financial crash in 2007/8 and the Covid pandemic pushed the UK’s debt up from those historic lows to where it stands now. However, in relation to the size of the economy, today’s debt is still low compared with much of the last century.
UK debt £2,590,000,000,000
The U.S, German and Italian borrowing costs also hit their highest levels for more than a decade as markets adjusted to the prospect of a long period of high interest rates and the need for governments around the world to borrow.
It follows an indication from global central banks, including the United States Federal Reserve and the Bank of England (BoE), that interest rates will stay ‘higher for longer’ to continue their jobs of bringing down inflation.
£111billion on debt interest in a year
During the last financial year, the government spent £111 billion on debt interest – more than it spent on education. Some economists fear the government is borrowing too much, at too great a cost. Others argue extra borrowing helps the economy grow faster – generating more tax revenue in the long run.
The Office for Budget Responsibility (OBR), has warned that public debt could soar as the population ages and tax income falls. In an ageing population, the proportion of people of working age drops, meaning the government takes less in tax while paying out more in pensions, welfare and healthcare services.
