Government borrowing in the UK surged unexpectedly last month, reaching the second-highest February level on record, as warnings emerged of a potential "double squeeze" on public finances due to the ongoing conflict in Iran.
The Office for National Statistics (ONS) reported that public sector borrowing hit £14.3 billion in February, marking a £2.2 billion increase from the previous year and almost doubling the £7.4 billion projection made by the Office for Budget Responsibility (OBR) last November. This figure defied economists' expectations, who had largely anticipated borrowing to be around £8.8 billion for the month.
Despite this monthly surge, borrowing for the first 11 months of the financial year, up to March, stood at £125.9 billion. This represents an £11.9 billion reduction compared to the same period last year and is £1.9 billion below the OBR’s November forecast of £127.8 billion.
According to Martin Beck, chief economist at WPI Strategy, the UK is now on track to slightly undershoot the OBR’s full-year borrowing forecast of £138.3 billion. However, Beck cautioned that public finances could face a significant setback if the conflict in Iran were to be prolonged.
He said: “That the deficit numbers are broadly on track will be a welcome development for a government keen to preserve fiscal credibility at a time of unwelcome geopolitical and economic turbulence.
“But that turbulence means the recent fiscal numbers may prove a poor guide to what comes next.
“The shock to energy prices creates a double squeeze for the public finances if it persists.
“Higher oil and gas prices would lift North Sea revenues, and stronger inflation could boost receipts from VAT and frozen tax allowances, but those gains would likely be outweighed by the damage to tax revenues from weaker growth and higher public spending on welfare, debt interest costs, and pressure for fiscal support for households and energy-intensive businesses.”
The data showed Government borrowing in February was pushed up by £13 billion of debt interest payments – a record February high and £5.5 billion up on a year ago – due to increases in Retail Prices Index (RPI) inflation impacting index-linked gilts and the timing of debt interest payments from January that fell into last month.
Tom Davies, senior statistician at the ONS, said: “While receipts were up on last year, that was outweighed by a rise in spending, including the later timing of some debt interest payments.
“However, across the first 11 months of this financial year as a whole, borrowing was down, as receipts increased by more than spending.”
Chancellor Rachel Reeves had been hoping for increased financial headroom from reduced borrowing costs.
The OBR said earlier this month that reduced borrowing costs meant the Government’s headroom to meet its fiscal rules widened to £23.6 billion, compared with £21.7 billion in November’s budget.
But the Iran conflict and prospect for interest rates staying higher for longer has already sent yields on Government bonds, also known as gilts, jumping higher.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “The public finances will be hit hard if high energy prices persist for long.
“Gilt yields have surged across the curve since Mr Trump began bombing Iran, as investors price in higher inflation and hikes from the Monetary Policy Committee.
“We estimate that increases in gilt yields will cut the Chancellor’s headroom by £7.1 billion in 2030-31, if sustained at current levels.”
“The Chancellor will again have to make difficult decisions in the Autumn Budget unless hostilities end quickly and energy prices subside,” he warned.
James Murray, Chief Secretary to the Treasury, said: “Because of the choices we made before the conflict in the Middle East began, we are better prepared for a more volatile world.
“We doubled our headroom and borrowing was forecast to be lower than the G7 average.”
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