Borrowing figures show Reeves is in a fiscal bind ahead of Budget
With just over a week to go until the Budget, things are not getting any easier for the Chancellor.
The latest figures showed that borrowing in September exceeded expectations yet again, driven by higher government spending.
This means that in the first six months of the financial year, borrowing has exceeded the Office for Budget Responsibility’s (OBR) March forecasts by £6.7bn.
In the grand scheme of the nation’s finances, that’s not a huge overshoot. But this was the fifth consecutive overshoot pointing to the pressures facing Rachel Reeves.
It is worth noting that these pressures will not disappear if Reeves changes the fiscal rules to allow for more investment, because she has committed to keeping a balanced budget on day-to-day spending.
That’s why the Chancellor is likely to announce a big increase in taxes next week.
Budget: Ready for tax increases
Rob Wood, chief UK economist at Pantheon Macroeconomics, said this rule demonstrated a “commitment to sustainable finances – unlike during the Liz Truss episode, which saw borrowing to fund an inflationary sugar rush of tax cuts”.
The fiscal trends which have been playing out all year were apparent again in September. The spending overshoot was driven by more spending on debt interest as well as higher costs due to inflation.
This was partially offset by higher tax revenue, with income tax receipts rising slightly faster than anticipated. Alex Kerr, UK economist at Capital Economics, said this suggests “stronger-than-expected wage growth is more than offsetting the slowing in employment growth”.
But things are not expected to get any easier for the government over the coming months.
This summer’s inflation-busting public sector pay increases have not yet been factored into the spending figures, which will put the Chancellor under further pressure.
Matt Swannell, chief economic adviser to the EY Item Club, also pointed out that much of this year’s overspend will reoccur in future years.
With Reeves unwilling to push through the deep spending cuts she inherited from Jeremy Hunt, she will have to raise taxes. It now looks likely that the Chancellor will lift employers’ national insurance contributions in the Budget and extend the freeze on income tax thresholds.
The latest reports suggest she wants to raise £40bn through tax rises and spending cuts so that crucial public services can receive a funding boost.
Looking longer term though, Reeves might have to countenance more fundamental reform.
In September, OBR projections – based on current government policies – suggested that national debt would spiral to 270 per cent of GDP. Spending is set to continue increasing while revenue remains roughly flat.
That’s a problem which, sooner or later, Reeves will have to address.