- The cost of energy support programmes is becoming increasingly apparent in the UK public finances data, with October's borrowing outturn including the first costs of the energy price guarantee and the energy bills support scheme. The cost of the scheme for businesses has still to be added, so large year-on-year increases in borrowing are likely for the rest of fiscal year 2023-2024.
- The scale of energy support will make it more difficult to gauge the underlying state of the public finances. However, the EY ITEM Club doubts the public finances will deteriorate to the extent that the OBR forecasts, so there's a significant possibility some of the planned fiscal tightening won't happen.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Public sector net borrowing (excluding public sector banks) came in at £13.5bn in October. This was £4.4bn higher than the same month a year earlier. The main factor behind the year-on-year increase in borrowing was the cost of support programmes to mitigate the impact of high energy bills. October saw the Government incur the first costs related to the energy price guarantee and energy bills support scheme for households.
“But the ONS has not yet been able to estimate the cost of the energy bill relief scheme for companies, so October's borrowing figure is likely to be revised higher in future releases. And with the ONS describing its costing of the household schemes as an “initial indicative estimate”, it appears it may be some time before the true borrowing picture emerges.
“October's outturn took borrowing over the first seven months of fiscal year 2022-2023 to £84.4bn – £21.7bn lower than the same period in 2021-2022. The OBR is yet to publish a monthly profile that is consistent with its forecast that borrowing will total £177bn in fiscal year 2022-2023. Extrapolating the year-to-date change or the October overshoot implies the OBR's forecast may prove too high, but the EY ITEM Club expects this picture to change once the costs of energy support have been fully accounted for.
“The outlook further out is also rather uncertain. But given that last week's OBR forecast was based on relatively high assumptions for interest rates and gilt yields, the EY ITEM Club thinks it is quite possible that the public finances will perform better than the OBR anticipates. This could mean that the Government is able to pare back some of the fiscal tightening that is currently planned for 2025-2026 and beyond.”