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December public finances: rising debt interest costs offset higher tax revenues

Author: ICAEW Insights

Published: 25 Jan 2022

December’s deficit of £16.8bn saw both a rise in tax revenues and in interest on inflation-linked debt as pressure grows on the Chancellor to address energy price hikes and rising prices in the shops.

The public sector finances for December 2021 released on Tuesday 25 January 2022 reported a monthly deficit of £16.8bn. This was £7.6bn lower than the £24.4bn reported for December 2020 but £11bn higher than the £5.8bn deficit reported for December 2019.

This brings the cumulative deficit for the first nine months of the financial year to £146.8bn compared with £276.1bn and £58.4bn for the same period last year and the year before that respectively.

Public sector net debt increased from £2,321.8bn at the end of November to £2,339.9bn or 96% of GDP at the end of December. This is £205.5bn higher than at the start of the financial year and an increase of £546.8bn from March 2020. As a proportion of GDP, debt is the highest it has been since March 1963, almost 60 years ago.

The deficit for the month was in line with the revised forecast for 2021/22, published by the Office for Budget Responsibility (OBR) alongside last October’s Autumn Budget and Spending Review 2021, although higher than forecast interest charges on index-linked debt offset the benefit of higher than forecast tax revenues.

Cumulative receipts in the first three quarters of the 2021/22 financial year amounted to £641.4bn, £82.8bn or 15% higher than a year previously, but only £44.2bn or 7% above the level seen in the first three quarters of 2019/20. At the same time, cumulative expenditure excluding interest of £700.5bn was £52.4bn or 7% lower than the first nine months of 2020/21, but £113.4bn or 19% higher than the same period two years ago.

Interest amounted to £53bn in the nine months to December 2021, £20.5bn or 63% higher than the same period in 2020/21, principally because of the effect of higher inflation on index-linked gilts. Interest costs were £10.6bn or 25% more than in the equivalent nine months ended 31 December 2019.

Cumulative net public sector investment in the three quarters to December 2021 was £34.7bn. This was £14.6bn or 30% less than the £49.3bn reported for the first nine months of last year, which included around £17bn of COVID-19-related lending that the government does not expect to recover. Investment was £8.6bn or 33% more than two years ago, principally reflecting greater capital expenditures, including on HS2.

The increase in debt of £205.5bn since the start of the financial year comprises the deficit of £146.8bn and £58.7bn in other borrowing. The latter was used to fund lending to banks through the Bank of England’s Term Funding Scheme, lending to businesses overseen by the British Business Bank (including bounce-back and other coronavirus loans), student loans, and other cash requirements, net of the receipt of taxes deferred last year and loan repayments.

Martin Wheatcroft FCA, external advisor on public finances to ICAEW, said: “Today’s numbers highlight the impact inflation is having on the public finances, with higher tax revenues collected in December offset by the rising cost of index-linked debt. We expect interest charges to increase further in the next few months as the time lag on index-linked debt catches up with the current 7.5% rate of RPI.

“With borrowing costs low and headroom in forecasts for the next financial year, the temptation will be to delay fixing the public finances in order to tackle the immediate hit to household budgets from anticipated energy prices hikes and higher prices in the shops, so pressure on the Chancellor to postpone or phase in April’s national insurance rise is likely to grow.”

Public sector finances 2021/22: nine months to 31 December 2021

   9 months to
Dec 2021
Variance vs
prior year
Variance vs
two years ago
   £bn  £bn  %  £bn  %
Receipts  641.4  82.8  +15%  44.2  +7%
Expenditure  (700.5)  52.4  -7%  (113.4)  +19%
 Interest  (53.0)  (20.5)  +63%  (10.6)  +25%
Net investment  (34.7)  14.6  -30%  (8.6)  +33%
Deficit  (146.8)  129.3  -47%  (88.4)  +151%
Other borrowing  (58.7)  4.2  -7%  (65.8)  -927%
 (Increase) in net debt  (205.5)  133.5  -39%  (154.2)  +301%
Public sector net debt  2,339.9  207.8  +10%  534.0  +30%
Public sector net debt / GDP  96.0%  0.4%  -  13.6%  +17%

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of decreasing the reported fiscal deficit for the eight months to November 2021 from £136bn to £130bn and the deficit for the year ended 31 March 2021 from £321.9bn to £321.8bn.

Public sector finances 2021/22: fiscal deficit by month

Receipts Expenditure Interest Net investment Deficit
£bn £bn £bn £bn £bn
Apr 2021 67.2 (80.1) (5.0) (5.9) (23.8)
May 2021 67.7 (79.4) (4.5) (2.2) (18.4)
Jun 2021 70.0 (76.9) (9.2) (2.8) (18.9)
Jul 2021 77.6 (77.2) (3.6) (2.7) (5.9)
Aug 2021 70.7 (77.0) (6.6) (3.0) (15.9)
Sep 2021 70.7 (78.3) (5.0) (6.7) (19.3)
Oct 2021 71.4 (75.7) (6.0) (2.7) (13.0)
Nov 2021 70.5 (76.8) (4.8) (3.6) (14.8)
Dec 2021 75.6 (79.1) (8.3) (5.1) (16.8)
Cumulative 641.4 (700.5) (53.0) (34.7) (146.8)

For further information, read the public sector finances release for December 2021.

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