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The UK government borrowed more than expected in February as increased spending offset increased revenue, highlighting the fragility of public finances ahead of the general election.
According to the Office for National Statistics on Thursday, public sector net borrowing was £8.4 billion in February, £3.4 billion less than the same month last year. However, this is higher than the £5.9 billion forecast of economists polled by Reuters.
In the first 11 months of the financial year to the end of February, borrowing was £106.8 billion, £4.6 billion less than in the same period a year ago, and the lowest for four years in nominal terms.
The Office for Budget Responsibility, the government’s fiscal watchdog, predicted in March that borrowing would total £114.1 billion in the fiscal year ending in March. This is lower than November’s forecast of £124 billion, thanks in part to lower interest payment costs reflecting a faster-than-expected fall in inflation.
“Disappointing public finance data for February suggests that the OBR’s new lending forecasts for 2023-24 published in the March Budget already look too optimistic,” said Ruth Gregory, an economist at Capital Economics. “But that may not stop the government from introducing another pre-election tax cut later this year.”
Borrowing decreased compared to last year on the back of increased tax revenues, which increased by 10%. Gregory said the figures provide “some evidence that tax revenues have remained strong.”
However, higher public sector revenues were partially offset by increased spending as central government last month made the final cost of living payment of the current financial year to eligible recipients of around £2 billion.
This payment, combined with increased spending on inflation-linked benefits, offset the reduction in costs of the government’s energy support programs, which have now largely ended.
Interest expenses on central government debt stood at £6.8 billion in February, down £1.1 billion on last year and the lowest figure for that month since 2022.
Treasury Chief Secretary Laura Trott said: “It was right that this Government provided billions of pounds to support individuals and businesses during Covid and pay half of people’s energy bills after [Russian president Vladimir] Putin’s invasion of Ukraine.
“Because of the difficult decisions we have made, the economy is turning a corner, inflation is falling and wages are rising,” he added.
The data was released on Thursday ahead of the Bank of England’s monetary policy decision. The BoE is expected to keep interest rates at a 16-year high of 5.25%, having held them at its last meeting in February.
On Wednesday, official statistics showed that inflation fell more than expected in February to 3.4% from 4% the previous month.
ONS data showed public sector net debt – or indebtedness accumulated over time – stood at 97.1% of gross domestic product, the highest since the early 1960s, highlighting the challenge of the next government in public finances.
Gora Suri, an economist at consultancy PwC, said: “This government and the next will face a Herculean task both to stimulate a flat economy and to keep public finances on a sustainable basis.”