Britain Faces Larger Budget Deficit in December

By Andy Bruce and William Schomberg

(Reuters) – Britain recorded a larger-than-expected budget deficit in December, attributed to high debt interest costs and a one-time purchase of military homes, according to official data. The figures highlight the fiscal pressures on Finance Minister Rachel Reeves.

Public sector net borrowing reached £17.8 billion ($22 billion) in December, exceeding projections by £10 billion compared to the previous year, as reported by the Office for National Statistics.

Economists had predicted a median of £14.1 billion for headline public sector net borrowing.

Following the budget announced on October 30, which involved increased borrowing and higher employer taxes to enhance public services, the economic landscape has turned against Reeves, increasing the likelihood of further measures to adhere to the government’s fiscal rules.

In an interview with Bloomberg during the World Economic Forum’s annual meeting in Davos, Switzerland, Reeves claimed that Britain’s public finances were under control but noted the need for ongoing decisions to meet fiscal targets.

Earlier in the month, a notable sell-off in British government bonds, largely influenced by changes in U.S. interest rate expectations, compelled Reeves to state her commitment to fulfilling the fiscal rules.

These rules include balancing everyday spending with revenues by the decade’s end and reducing public sector net financial liabilities as a proportion of GDP.

However, market borrowing costs have seen a decline in the last week, making British gilts the third best-performing bonds among the G7 countries this year.

Cara Pacitti, a senior economist at the Resolution Foundation think tank, remarked that a recent slowdown in the economy had yet to affect the data, with tax receipts continuing to rise robustly. She noted, “Despite that, with tax returns due this month and ongoing market concerns regarding UK debt servicing costs, there is still much for the Chancellor to worry about.”

The government’s cash deficit, an essential indicator for the gilt market, is on course to align with budget forecasts. Reeves emphasized that driving economic growth is her priority, highlighting recent changes in leadership at the antitrust regulatory body due to its lack of focus on this issue.

The ONS reported that the government faced an £8.3 billion debt interest bill in December, marking the third-highest December total on record. A £1.7 billion expenditure for the repurchase of military housing added to the overall borrowing.

For the first nine months of the 2024/25 financial year, Britain has borrowed £129.9 billion, surpassing the Office for Budget Responsibility’s expectation of £125.9 billion by this point in the year. Public sector net financial liabilities increased from 84.0% to 84.5% of GDP in December.

($1 = 0.8118 pounds)