The pound fell and government borrowing costs rose on Friday despite a pledge to Jeremy Hunt that he would do “whatever is necessary” to reduce the national debt.
As financial markets assess the potential for continued instability within the Conservative Party following the election of a new leader, the Chancellor said it was essential to stabilize public finances.
Government borrowing hit £20billion in September, £2.2billion more than last September and £3billion more than economists forecast, pushing interest payments on the debt to a record level.
Rising borrowing pushed interest payments on debt to £7.7bn last month, according to the Office for National Statistics, up £2.5bn from September 2021 and the highest September figure since monthly records began in April 1997.
Hunt said: “Strong public finances are the foundation of a strong economy. To stabilize the markets, I have been clear that protecting our public finances means that tough decisions lie ahead.
“We will do whatever is necessary to reduce debt over the medium term and ensure that taxpayers’ money is well spent, putting public finances on a sustainable path as we grow the economy.”
The market fears a number of tax reduction measures announced by former Chancellor Kwasi Kwarteng in his mini-budget – and swiftly reversed by Hunt – ultimately resulted in Liz Truss stepping down as prime minister on Thursday and underscored the scale of the challenge facing her successor.
Government borrowing costs rose slightly on Friday, with the interest rate on 10- and 30-year government bonds rising above 4%. The pound fell one cent against the dollar to $1.1121 before recovering to fall 0.3% to $1.1205.
Analysts at ING, who previously said UK 10-year government bonds would struggle to stay below 4%, warned Hunt that a budget “delivered within days of the start of a new prime minister, with a set of measures that were crafted without their input” could scare the markets further.
“There is a chance the plan will be pushed back for a week or two – but at the cost of happening after the Bank of England meeting on November 3,” they said.
The Institute for Fiscal Studies said the sharp rise in government borrowing over the summer meant the total for the financial year could hit £200billion, more than double a forecast made by the Office of Budget Responsibility (OBR) in March.
Officials from the OBR, which provides the Treasury with independent forecasts of tax revenue and economic growth, estimated that government borrowing would reach £99.1billion in the year to the end of March 2023.
Then-Chancellor Rishi Sunak warned the deficit could rise as the impact of war in Ukraine is felt in rising energy bills, wiping out the government’s ability to fuel growth with higher expenses.
Carl Emmerson, deputy director of IFS, said the budget planned for October 31 should be delayed until the political situation has stabilized, leaving it to the Chancellor to reconfigure public finances to take account of inflation and rising debt payments.
He said the most recent figures gave “little indication of the amount of borrowing over the whole of this fiscal year, as the huge cost of government support for household and business energy use n only really started this month.
“We need a credible plan to ensure that public debt can come down over the medium term. Given the timeline for determining the next prime minister, the degree of economic uncertainty, and the importance of getting it right, there are good reasons to take a little more time to make good decisions that have more chances of standing the test of time rather than forging ahead with a major fiscal event just days into the new Prime Minister’s term.
James Smith, research director at the Resolution Foundation, said higher borrowing added £5bn to the bill compared to the OBR’s March forecast, which was “a reminder that amid the current political turmoil, the difficult task facing the government of demonstrating fiscal credibility lies immediately ahead rather than behind.”
Total government debt, excluding public sector banks, soared to £2.45tn, around 98% of gross domestic product (GDP). Compared to September 2021, this represents an increase of £213 billion or 2.5 percentage points of GDP.
Figures from Eurostat, the EU’s statistical agency, showed the average debt-to-GDP ratio in its 27 member states fell to 94.2% in the second quarter of the year from three months earlier. previous ones.
The debt-to-GDP ratio increased in France to 113.1% and to 108.3% in Belgium, while that of Germany remained stable at 67.8%.
Italy’s debt fell nearly 2% to 150.2% from the previous quarter and 164% before the coronavirus pandemic. Ireland, Greece and Cyprus were among other countries to reduce their debt as a percentage of GDP.