Press release

25 Jan 2022 London, GB

Borrowing still falling despite higher debt interest costs – EY ITEM Club comments

Strong growth in tax receipts continues to keep public sector net borrowing running below the OBR’s forecast, despite the increasing pressure on government spending from higher debt servicing costs

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  • Strong growth in tax receipts continues to keep public sector net borrowing running below the OBR’s forecast, despite the increasing pressure on government spending from higher debt servicing costs.
  • As things stand, there’s a good chance borrowing will come in below the OBR’s full-year forecast. But this will be influenced by the size of any measures announced by the Government to ease pressure on households from high fuel bills.

Martin Beck, chief economic advisor to the EY ITEM Club, says: 

“Public sector net borrowing came in at £16.8bn in December, £7.6bn lower than a year earlier. Data is now available for the first nine months of fiscal year 2021-2022 and shows borrowing of £146.8bn, which is £13.0bn lower than the OBR’s forecast. Central government receipts continued to outperform, up 15% year-on-year (y/y) over the fiscal year to date, with economic growth running ahead of the OBR’s relatively cautious forecast. But that’s increasingly being offset by the upward pressure on government spending caused by higher debt servicing costs, with much higher-than-expected inflation raising the payments due on index-linked gilts.

“Similar pressures on spending are likely to persist over the remaining three months of the fiscal year but, as things stand, borrowing should still come in below the OBR’s full-year forecast of £183bn. However, this will be influenced by what, if any, measures the Government announces to take the pressure off households’ finances from rising energy bills.

“The OBR’s judgements on the medium-term outlook will play a role here. The EY ITEM Club thinks that the OBR is too gloomy on medium-term growth prospects, although the next forecast on 23 March is probably too soon for the OBR to make significant revisions. There’s also significant uncertainty about how the OBR’s assumptions for inflation and interest rates will evolve. But the EY ITEM Club would be surprised if the OBR presented a forecast that reduced the degree of fiscal headroom available to the Chancellor, meaning there should be leeway to ease the pressures caused by high energy prices.”