Less borrowing and lower interest: the United Kingdom’s public finances are better than anticipated by official forecasts, news which will nevertheless offer little budgetary room to a Conservative government under strong political pressure.
For the first six months of the UK fiscal year, which begins in April, the UK borrowed 81.7 billion pounds, significantly less than the 101.5 billion that had been projected by the public budget forecasting body OBR, according to data published Friday by the National Statistics Office (ONS).
Interest on the government debt amounted to 700 million pounds for the month of September, “7.2 billion pounds less” than a year earlier, adds the ONS, a drastic drop which can be explained largely by the decline in inflation (some government bonds being indexed to a retail price index).
If analysts emphasize that this improvement should only be short-lived, these figures are nevertheless rare good news for the conservative party in power, given the loser in the polls for the next legislative elections next year, and which has just suffered a large defeat in two by-elections against the Labor Party.
British Finance Minister Jeremy Hunt, who is due to present the autumn budget next month to Parliament, is under particular pressure to lower taxes, which he seems to rule out for the moment.
“Not sustainable”
Jeremy Hunt refrained from any triumphalism, judging in a press release that after having had to borrow massively during the pandemic, the Russian invasion of Ukraine “drove up inflation and interest rates”, placing the British debt in a situation which is “clearly not sustainable” according to him.
Economists do not exclude that the Chancellor will have a little more room during a subsequent budget presentation, in March, to make – modest – tax gifts.
If public finances are better than forecasts, the context could reverse “in the medium term due to lower growth, more persistent inflation” and a context of high interest rates, warns Michal Stelmach economist at KPMG.
And “the impact of rising interest rates will continue to drive up borrowing costs in the years to come,” adds Cara Pacitti, economist at the Resolution Foundation think tank.
British government borrowing rates on the market are currently moving at historically high levels: 30-year yields soared to a 25-year high on Friday, with the market estimating that the Bank of England (BoE) will have to maintain its high rates for longer, or even raise them further.
If the BoE, which has sharply raised its key rate in recent months in the face of price increases, took a break last month, the institution closely monitors inflation, which interrupted its decline in September in the United Kingdom, stagnating at 6.7% over one year, the highest of the rich G7 countries.
Pressures
The UK economy has been more resilient since the pandemic than the ONS initially measured, but it remains on the brink of recession and negative signals are mounting.
According to data released on Friday, retail volume sales fell 0.9% last month as “cost of living pressures” weigh on consumers’ budgets, and the consumer confidence index of the The GfK institute started to fall sharply again in October.
Taking into account this very cloudy horizon for the British economy and its public finances, the rating agencies Moody’s and Standard & Poor’s (S&P) must say on Friday whether or not they are modifying their ratings for London’s debt.
Russ Mould, analyst at AJ Bell, told AFP that they should not be based solely on the most recent data, particularly those from Friday.
“If the latest borrowing figure is lower than forecast, the UK continues to borrow” and therefore total debt continues to increase”, even if it does so more slowly, it says.
Susannah Streeter, analyst at Hargreaves Lansdown, expects rating agencies to be cautious and maintain their current ratings, namely Aa3, negative outlook for Moody’s and AA/A-1 stable for S&P.
This article is originally published on zonebourse.com