The budget deficit in the UK widened to more than £27bn in December. A tripling from a year earlier. And with that, the deficit has widened much faster than economists previously expected.
The budget deficit has therefore reached a level that the UK has not seen since the corona pandemic, says UK economist Stefan Koopman of Rabobank. “It depends on two factors,” he says. ‘First of all there are inflation-linked government bonds. They account for more than a quarter of UK national debt and are bonds specifically designed to protect investors from higher inflation.’
According to Koopman, coupon payments and principal on such bonds increase with inflation, and investors are protected from this. “Inflation is up 14% this year, but if investors are protected, the downside is that public finances become much more sensitive to that inflation,” she continues. “So you saw that last month the government had to set aside £17bn just to finance the existing national debt. That’s a huge factor playing a role now.’
Energy subsidies
On the other hand, energy subsidies for businesses and households play a role, Koopman says. “The government had to spend around £7bn in December,” he continues. “If you take those two factors into consideration, you can explain a lot of the increase.”
Still, think it’s a concern. “The British not only have a deficit on the government budget, but also on the trade balance,” she says. “And if you have a double deficit, it means you depend on foreign investors to finance your country. They should, as it were, fill the gaps that emerge in British finances.
Confidence returns
Koopman points out that the UK is on the right track, including when it comes to foreign investors. “There is some faith in Rishi Sunak again, but if it is lost – as happened in September with Liz Truss – it could lead to higher interest rates, a weaker exchange rate, so there is still a risk hanging over the market.”
Just like there is a major recession looming over the market. Economists expect this to be guaranteed, but Koopman doesn’t think the budget deficit can get much bigger then. “A recession is coming and you’re right that something like this puts more pressure on public finances,” he says. “But I think the factors coincided in such a unique way that we had the peak.”
By way of example, he cites gas prices and inflation, «because they have decreased slightly in recent months. So you will see that the impact of these two factors will also decrease a bit.’
Source: BNR
Sharon Rock is an author and journalist who writes for 24 News Globe. She has a passion for learning about different cultures and understanding the complexities of the world. With a talent for explaining complex global issues in an accessible and engaging way, Sharon has become a respected voice in the field of world news journalism.
