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Government borrowing surges and will "come at the expense" of British Public

Journalist: John Choong (Head of Markets and Research), Newspage

ended 22. October 2024

The UK government recorded a deficit of -£16.6bn in September. This was more than consensus estimates of a deficit of -£10.3bn, and higher than the Office of Budget Responsibility's (OBR) forecast of -£14.7bn. This is also an increase from last September's figure of -£14.5bn.

Meanwhile, the more crucial net borrowing figure which excludes public banks, was also recorded at -£16.6bn. Althought this was better than consensus estimates of -£17.5bn, it remains worse than the OBR's estimate of -£15.6bn.

As a result, public sector net debt excluding public sector banks as a percentage of gross domestic product (GDP) was provisionally estimated at 98.5% — 4.0% higher from last September, but 1.5% lower than August's 100.0%.

Newspage asked experts for their opinions on the latest figures, what this could spell for the upcoming Budget, as well as their likely impact on swap rates and gilt yields.

4 responses from the Newspage community

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Editor
David Belle
Founder and Trader at Fink Money
The Bank of England owns about 25% of outstanding government debt. This means that if Threadneedle Street were to simply let those bonds mature, rather than offload them, government debt as a percentage of GDP would only be at 92% instead. The issue here, however, is that the Treasury has indemnfied the Bank of England's bond portfolio against any losses. This means that the taxpayer is on the hook for these losses. Hence, if the Bank of England sells the bonds for less than they bought them for, the taxpayer is forced to pay for it via the Treasury. However, if Reeves got rid of this indemnity and did what other Treasuries did in the past — which is simply to NOT have this relationship with its own central bank, the supposed £22bhn 'black hole' would magically vanish, especially with interest rates coming down. Therefore, this begs the question as to why the government continues to stick to such a silly accounting practice between departments when they can easily fix the issue?
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Editor
Ben Perks
Managing Director at Orchard Financial Advisers
Robbing Peter to pay Paul. You can’t borrow yourself out of trouble, so I sincerely hope that an increase in borrowing has been done with a specific long-term objective in mind. If we have injected funds into projects that will help the economy in future, fair enough. But if this is the result of mindless spending and people pleasing, hardworking Britons will have to pay for it down the track.
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Editor
Stephen Perkins
Managing Director at Yellow Brick Mortgages
The UK’s credit limit is being maxed out, much like that of many UK households who are using credit to keep their heads above water as the continued impacts of the cost-of-living crisis and higher interest rates weigh down on them.
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John Choong
Head of Equities and Markets at Investors Edge
What's particularly alarming from the latest borrowing figures is cumulative borrowing, which has now widened to £6.6bn against the OBR's projections, and higher than the £5.2bn recorded last month. What's more, spending so far this year has now overtaken last year's. As we approach next week's autumn Budget, Rachel Reeves faces an unenviable dilemma of navigating between Scylla and Charybdis. Considering the lack of fiscal headroom, she must either orchestrate widespread tax hikes in order to fund Labour's ambitious spending plans, or risk unsettling the bond market with increased bond issuance. However, given Reeves's commitment to maintaining bond market stability, we're likely heading towards the former scenario instead, meaning the whispers of various tax increases circulating in recent weeks are likely to materialise into reality. And unfortunately, this will come at the expense of the British public who are just beginning to recover from a grappling cost-of-living crisis.