UK chancellor faces challenges from high debt, slowing GDP growth: By Investing.com analyst

Investing.com — Britain’s chancellor faces significant challenges amid the country’s debt overhang and a backdrop of slowing GDP growth and high interest rates, according to Capital Economics.

Recently released figures for December show a higher-than-expected level of public sector borrowing, excluding banking groups, at £17.8bn, beating the Office for Budget Responsibility’s (OBR) projected figure of £14.6bn.

However, part of this overrun is attributed to a one-off payment of £1.7bn paid by the government to the private sector to buy back military accommodation. This payment, recorded as an investment, is not included in the borrowing measure of the current budget deficit, on which the Chancellor’s fiscal mandate is based.

Therefore, the overshoot on the OBR’s forecast of the current budget deficit of £8.7bn was £1.3bn less. The excess of borrowing in December, as well as in the entire fiscal year 2024/25, is largely caused by the borrowing of local governments and public enterprises.

These figures are often revised significantly. In total (EPA:) tax receipts of £85.6bn were slightly higher than the OBR’s forecast of £85.4bn. Although central government spending exceeded the OBR’s December forecast by £1.9bn, it was less than the OBR’s forecast by a cumulative £2.3bn for the full fiscal year.

The report also noted that despite the drop in expected market interest rates and gold yields in the past week, they are still higher than at the time of the budget. It suggests the chancellor’s headroom against her fiscal rules has shrunk from £9.9bn in October to £2.0bn. This, combined with a weakening economy, suggests the chancellor may need to raise taxes and/or cut spending in the next fiscal report, due on March 26.

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