Investing.com -- The UK Chancellor is facing significant challenges due to an overshoot in the country's borrowing and a backdrop of slowing GDP growth and high interest rates, according to Capital Economics.
The recently released figures for December have shown a higher than expected level of public sector borrowing, excluding banking groups, at £17.8bn, surpassing the Office for Budget Responsibility's (OBR) projected figure of £14.6bn.
A portion of this overshoot, however, is attributed to a one-off £1.7bn payment made by the government to the private sector for the repurchase of military accommodation. This payment, recorded as an investment, is not included in the current budget deficit measure of borrowing, which the Chancellor's fiscal mandate is based upon.
Therefore, the overshoot of the OBR’s current budget deficit forecast of £8.7bn was a smaller £1.3bn. The overshoot in borrowing in December, and in the 2024/25 fiscal year as a whole, was largely driven by local government and public corporations borrowing.
These figures are often heavily revised. Total (EPA:TTEF) tax receipts of £85.6bn were slightly higher than the OBR’s forecast of £85.4bn. While central government expenditure exceeded the OBR’s forecast in December by £1.9bn, it has been less than the OBR’s forecast by a cumulative £2.3bn in the fiscal year as a whole.
The report also noted that, despite market interest rate expectations and gilt yields having fallen in the last week, they are still higher than at the time of the Budget. This suggests that the Chancellor’s headroom against her fiscal rules has been reduced from £9.9bn in October to £2.0bn. This, combined with a weakening economy, indicates that the Chancellor may need to raise taxes and/or cut spending in the next fiscal statement, scheduled for 26th March.
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