UK government December borrowing down, but challenges still lie ahead-UPDATE

By Michael Millar

Date: Tuesday 24 Jan 2012

UK government borrowing (PSNBx) fell more than expected in December, down £2.2bn from a year earlier to £13.7bn if the temporary effects of financial interventions are excluded, versus a consensus estimate of £14.8bn.

The current public sector budget deficit hit £10.8bn while net investment rose slightly, to £2.875bn.

The extra borrowing took total government net debt above £1tn for the first time; last year it stood at £883bn, according to the Office for National Statistics (ONS).

Local government’s net borrowing requirement rose to £1.3bn in December 2011 after -£0.9bn a year ago, while the central government’s net borrowing requirement retreated to £12.8bn from £16.9bn.

The current net debt total of £1.003.9tn is equivalent to 64.2% of UK gross domestic product.

However, Chancellor George Osborne is still on course to hit his borrowing target for the year of £127bn, with the tally for the year so far standing at £103.3bn.

Analysts said if the overall performance of the first nine months was replicated through the rest of the fiscal year, borrowing would come in at £123bn in 2011/12.

But Dr Howard Archer, chief UK economist at IHS, said the public finances would be increasingly pressurised over the coming months by muted economic activity eating into tax revenues and pushing up unemployment benefit claims.

"There will be a lagged impact of the economy’s loss of momentum in recent months and it is likely not yet being fully reflected in the public finance figures," he said.

The ONS said that the bank levy and last January's VAT increase from 17.5% to 20% had buoyed tax receipts.

Central government spending fell by 0.9% as the government continued with its austerity drive.

A Treasury spokesman said national debt reaching more than £1tn showed "the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation's future that we deal decisively with the deficit".

"Today's figures show that we are making good progress, with borrowing over £11bn lower than in the same period last year," he added.


For her part, economist Blerina Uruci at Barclays Capital is today writing to clients that, “public sector borrowing data for the fiscal year to date indicates the government is broadly on track to hit its fiscal target for borrowing of £127bn and is making some progress towards cutting the deficit (which was about £136bn in 2010-11). However, despite the progress of recent months, the near-term outlook for public debt is not rosy.

“General government gross debt (which is more internationally comparable than the public sector net debt measure favoured by the UK government) currently stands at around 76% of GDP. Both we and the OBR expect it to rise steadily over the next three years, breaching the critical 90% level before declining only gradually (see chart). This highlights the fact that the government still has a significant challenge ahead if it is to put a brake on the rapid increase in the debt to GDP ratio and achieve its target of starting to cut this ratio by 2015-16.

“Rating agencies have cited 90% as a debt ratio a triple-A country would be expected to breach only temporarily, if at all. Although not under immediate threat, the UK's triple-A rating is far from assured.”

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