Public sector finances were in a much better state than expected in December. Overall public sector net borrowing (PSNB) weighed in at just £6.85 billion, some £5.65 billion less than the market consensus and that following a downwardly revised £13.71 billion in November. Compared with a year ago, the deficit fell nearly £8.3 billion. Excluding public sector banks (PSNB-X), the shortfall stood at £7.77 billion after a smaller revised £13.71 billion in the previous month and £16.17 billion at the end of 2022. These are the lowest December borrowing figures since 2019 and some £14.0 billion less than forecast by the independent Office for Budgetary Responsibility.

Much of the improvement was due to lower borrowing costs as debt interest payable dropped by fully £14.1 billion from a year ago to £4.0 billion. However, much of the fall here was offset by a sharp jump in investment as the December 2022 data were impacted by a significant student loans update. Still, receipts were up £5.0 billion, mainly on the back of higher VAT inflows. Public sector net debt (PSND-X) was £2,685.6 billion or around 97.7 percent of GDP. This was 1.9 percentage points higher than in the previous December and sustains levels last seen in the early 1960s.

At £119.1 billion, the PSNB-X over the financial year to date was £11.1 billion larger than over the same period in FY2022/23 and the fourth highest ever. However, the surprisingly low December results will boost expectations for a pre-election giveaway Budget in March, a point that will not be wasted on the BoE. Today's report nudges up the UK RPI to 3 and the RPI-P to minus 7. Both readings show overall economic activity performing broadly in line with forecasts.

Overall net borrowing (PSNB) is seen at £12.5 billion, down from November's £13.41 billion. Excluding public sector banks, the red ink is put at £13.4 billion.

The public sector net borrowing requirement (PSNB) is the difference between the sector's receipts and expenditure and so provides a simple measure of government fiscal policy. In response to the global economic crisis in 2008/09 the UK government introduced a number of measures designed to show the underlying state of public sector finances by omitting temporary distortions caused by financial interventions. It bases its fiscal policy on these measures. To this end, the underlying gauge of government borrowing watched most closely by financial markets is the PSNB-X which takes overall net borrowing (PSNB) but excludes public sector banks.

Changes in public sector finances can be used to determine the thrust of the government's fiscal policy. Generally speaking when the government has a rising deficit (or falling surplus) it is loosening its fiscal stance with a view to boosting economic activity. When its deficit is falling (or surplus rising), fiscal policy is being tightened in order to slow economic growth. However, sometimes changes in government financial positions can be due to factors outside of the government's control and do not signal an explicit shift in policy. This means that great care is needed in interpreting the data.