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The UK government borrowed £83.8bn in the first five months of the fiscal year, the highest total since the onset of the pandemic, laying bare chancellor Rachel Reeves’ challenge in November’s high-stakes Budget.
The shortfall between government spending and income was well above the £72.4bn forecast for the April to August period by the Office for Budget Responsibility, the UK’s fiscal watchdog.
Friday’s figures from the Office for National Statistics showed the government borrowed £18bn in August, as higher spending on public services and debt interest costs outstripped an increase in tax receipts. The OBR had forecast a shortfall of £12.5bn for the month.
Economists said the deterioration in the public finances meant it was almost certain that Reeves would be forced to raise taxes further in the Budget on November 26, after announcing £40bn worth of increases in her first Budget last October.
The pound slipped and long-term UK borrowing costs rose as the figures deepened investor fears over the state of the public finances. The pound was down 0.5 per cent against the US dollar at $1.349 and the 30-year gilt yield climbed 0.06 percentage points to 5.56 per cent.
The chancellor needs to plug a fiscal hole that some economists have estimated at more than £20bn to keep to the government’s key fiscal rule, which requires day-to-day spending to be funded entirely through tax revenues by 2029-30, and to restore her fiscal headroom.
Paul Dales, an economist at Capital Economics, said that, based on the latest data, the government would have to raise £28bn in the Budget, mostly through taxes.
The government’s effort to reduce public spending has faced a backlash from Labour MPs, with retreats on cuts to welfare and winter fuel payments.
In a sign of the mounting difficulties facing Reeves, the chancellor was privately warned by the OBR that it was likely to downgrade its productivity forecasts ahead of the Budget, increasing the prospect of her having to raise taxes again, the Financial Times reported this week.
Responding to the borrowing figures, James Murray, chief secretary to the Treasury, said: “This government has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest.”
Mel Stride, the shadow chancellor, hit out at the Labour government’s management of the economy, accusing it of being “too weak and distracted to take the action needed to reduce the deficit”.
In August, government spending rose by £8.2bn, or 9.2 per cent, compared with the same month last year, as public sector pay and the cost of providing public services rose, the ONS said. Debt interest costs climbed by £1.9bn to £8.4bn.
Martin Beck, chief economist at the consultancy WPI Strategy, said that if the pace of borrowing were maintained for the full fiscal year, the shortfall would exceed the OBR forecast by almost £20bn. That would, he added, make “tax rises in November look inevitable”.
The government has also vowed to use the Budget to boost economic growth, which slowed to 0.2 per cent in the three months to July.
Separate ONS figures on Friday showed British retail sales fell 0.1 per cent in the three months to August compared with the previous three-month period, on the back of lower purchases at tech stores and petrol stations.
The prospect of tax increases also dented consumer confidence in September, according to a survey from research company GfK. Consumer confidence dropped 2 points to minus 19, just below the 2024 average of minus 18, the survey said on Friday.
Neil Bellamy, consumer insights director at GfK, said: “With tax rises expected in the November budget, the risk is that confidence inevitably falls.”
Additional reporting by Ian Smith in London