Recent official data from the Office for National Statistics has revealed a substantial increase in UK public sector net borrowing, hitting £13.7 billion last month. This figure far exceeded the £11.2 billion forecast by the Office for Budget Responsibility, pushing the UK’s debt-to-GDP ratio to 100%.
The unexpected rise in borrowing reflects a significant fiscal challenge for the government. The higher figures have been largely driven by increased spending on benefits, which were adjusted in line with inflation, along with additional government expenditures. Interestingly, the cost of servicing the UK’s debt decreased for the fourth consecutive month, falling by £100 million to £5.9 billion, due to a decline in the retail price index measure of inflation.
Tax receipts from VAT, income tax, and corporation tax experienced an uptick compared to the same period last year, while national insurance contributions fell after a rate cut was introduced by the previous government. Labour has committed to not raising VAT, income tax, or corporation tax, all of which contribute significantly to government revenue.
It’s important to note that the UK’s overall borrowing has surpassed expectations for three consecutive months, currently standing £7 billion higher than anticipated since the fiscal year began in April. Labour, since coming to power in July, has highlighted a £22 billion fiscal shortfall left by the previous administration. However, Chancellor Reeves received a £10 billion fiscal boost ahead of her autumn budget plans, following the Bank of England’s announcement to reduce government bond sales. This move, part of the Bank’s quantitative tightening strategy, could potentially reduce losses covered by Treasury cash transfers, providing additional fiscal headroom.
The UK faces a considerable fiscal challenge as borrowing figures continue to exceed forecasts. The government’s ability to manage this growing debt, while maintaining critical public spending and not raising key taxes, will be closely scrutinised in the coming months.
