The cost of government borrowing set new records in November as rising inflation and cost of living payments pushed up government costs while tax revenues dropped.
The rise in inflation, coupled with higher borrowing costs and a bigger stock of debt after the pandemic, drove up the cost of servicing debt on the government’s index-linked gilts, which make up about a quarter of its total gilt portfolio.
The government paid £7.3 billion in interest on its debt last month, up from £4.9 billion in the same month last year. It is the highest November figure since comparable monthly records began in April 1997. The retail prices index, to which the gilts are linked, reached 14 per cent in November, down from a 42-year high of 14.2 per cent the previous month.
Inflation, as measured by the consumer prices index, is also thought to have peaked. It fell from 11.1 per cent in October to 10.7 per cent in November, driven by slowing price growth in petrol and diesel.
Public sector net borrowing rose to £22 billion, up from £8.3 billion in November 2021, to record the highest level of November borrowing since monthly records began in 1993. Economists had expected borrowing to hit £21 billion.
Government interventions to ease the burden of energy bills on households added to borrowing as the second batch of cost of living grants were paid to households in November.
As a percentage of gross domestic product, total debt — £2.47 trillion — now stands at 98.7 per cent. This represents a fall of 0.3 percentage points since November 2021 but an increase of £125.9 billion because of the rise in GDP over the period.
The public purse was squeezed from all angles as the Liz Truss government’s reversal of the 1.25 percentage point rise in national insurance contributions, introduced when Rishi Sunak was chancellor in April, lowered tax revenues when it came into force last month.
Jeremy Hunt, the chancellor, said: “Faced with the twin global emergencies of a pandemic and Putin’s war in Ukraine, we have taken significant action to support millions of businesses and families here in the UK. We have a clear plan to help halve inflation next year, but that requires some tough decisions to put our public finances back on a sustainable footing.”
Samuel Tombs, chief economist at the Pantheon Macroeconomics consultancy, said: “We continue to expect public borrowing to overshoot the OBR’s forecast in future years. Granted, we think that bank rate will peak at 4 per cent next year, below the 4.5 per cent priced-in by investors, and expect the MPC to reduce it gradually to 2 per cent between early 2024 and early 2026, with gilt yields falling commensurately.
“This implies interest payments will be about £10 billion below the OBR’s forecast in 2023/24 and £30 billion below its forecast in five years’ time.”
Retailers benefited from an unexpected rebound in sales in the run-up to Christmas but are braced for it to be the last good news for a while, with sales expected to fall back in the new year, a survey shows.
Sales volumes grew at a “moderate pace” in December compared with the same month last year, despite expectations of a decline, according to the latest distributive trades survey by the CBI, the trade body that represents businesses.
The survey of 138 companies, including 50 retailers, found that a net balance of 11 per cent of businesses said sales grew, up from -19 per cent in November. Sentiment surveys are calculated by asking respondents whether a metric rose or fell and to what extent, with responses weighted based on their market share to produce a net balance between -100 per cent and 100 per cent where 0 separates growth from contraction.
The growth in sales is expected to falter in the new year with businesses’ expectations for January recording a net balance of -17 per cent. Respondents considered the December sales volumes to be in keeping with the time of year.
Online sales, which boomed during the pandemic, have continued their downward trend, falling to a balance of -22 per cent in December, down from -5 per cent the previous month. Businesses expect a steeper decline of -34 per cent in January.
In a sign that demand is weakening, new orders placed with suppliers fell this December compared with the same period last year. However, orders are falling at a slower pace than last month, at -21 per cent, up from -32 per cent in November.
The figures add to concerns that the economy is entering a recession in the present quarter following a contraction of 0.2 per cent in the three months to September. Official figures for growth in the final quarter of this year will be published by the Office for National Statistics (ONS) in February.
According to separate figures published by the ONS, retail sales fell unexpectedly last month as Black Friday discounts and early Christmas shopping failed to offset the impact of soaring prices.
Total sales of goods and services across the economy fell by 0.4 per cent in what is usually a key period for retailers. The drop came after a revised 0.9 per cent rise in October, when there was a bounceback from the extra bank holiday for the Queen’s funeral the previous month.
Martin Sartorius, principal economist at the CBI, said: “It’s encouraging to see retail sales surprise by growing this month, but any festive cheer is expected to be short-lived. Retailers are bracing themselves for the chill winds that will blow through the sector this winter, with consumer spending set to be hit hard by high inflation in 2023.”
He added: “The decision by the UK government to freeze business rates from April provides some welcome relief to the retail sector. However, retailers also need to see long-term sustainable growth measures from the government to encourage investment and address ongoing labour shortages.”