UK public sector borrowing fell much more than expected last month, as the Chancellor prepares for his Autumn Statement next month, but borrowing costs on long-term gilts rose to multi-year highs.
Government borrowing was £14.3 billion in September, better than the £18.3 billion expected and £1.6 billion less than a year ago, but still the sixth-highest September borrowing since monthly records began in 1993.
The interest payable on central government debt in September was £0.7 billion, £7.2 billion less than in September last year and the third lowest in any month since monthly records began in 1997.
This largely reflected the fall in the retail prices index between June and July 2023 reducing the inflationary impact on index-linked gilts.
In the financial year to September, the UK government borrowed £81.7 billion, less than the £101.5 billion forecast for the period by the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog.
Public sector net debt was estimated at around 97.8% of UK gross domestic product (GDP), leaving it hovering near levels last seen in the early 1960s.
Economist Martin Beck at the EY Item Club said the better-than-expected fiscal performance "does little for the Chancellor's room for manoeuvre in next month's Autumn Statement".
The OBR's March forecast for real GDP growth over the next few years now looks optimistic, he added.
"The OBR is likely to downgrade its GDP forecast for the next few years, while government borrowing costs are much higher than the official forecaster had assumed. Granted, high inflation is aiding the fiscal position in some respects.
"But the Chancellor may well have to pencil in more medium-term fiscal tightening, however unrealistic, if the Government is to meet its self-imposed rules."
Cameron Misson, economist at the CEBR, said the borrowing figures highlight efforts by the current government to tighten the fiscal purse and manage its finances.
"However, near-term pressure still remains, amidst higher bond yields and their implications on debt servicing costs. Further, sluggish economic growth and subdued economic activity will weigh on future tax revenues."
Borrowing costs
Gilt yields are much higher than the OBR assumed in March.
Indeed, yields on UK government bonds have been rising in recent months and on Friday the borrowing costs for the UK 30-year gilt hit a 25-year high, with 10-year UK gilts also hovering close to a 15-year high.
The yield is the amount the UK government has to pay to borrow money.
Middle East tensions have been attributed to driving yields higher, stoking concerns of a further rise in oil prices driving concerns about further rate hikes from the Bank of England or higher-for-longer inflation, not helped by a weak pound.
Friday saw yields on 30-year gilts rise to their highest since 1998, part of a broader global move in long-term government borrowing costs.
The yield on the benchmark 30-year gilt rose as high as 5.162% late on Friday morning, up from 5.015% at the start of the month.
On the 10-year, the yield hit 4.725% on Friday, equalling levels seen yesterday and the highest since August 2008.