With her Budget fast approaching, Chancellor Rachel Reeves is preparing for this new world. She heads into this showdown with a very tough fiscal backdrop, including government borrowing numbers that came in more than expected just days ago. The Office for National Statistics (ONS) announced that public sector net borrowing was £16.4 billion for October 2023. This is a £21 billion decline from £19.2 billion in the same month last year. That total borrowing for the first seven months of the financial year is £116.8 billion. That level is £9 billion up on the same period in 2024.
It’s local government spending that’s responsible for most of the runaway government borrowing. Together, these data paint a telling picture of this growing trend. Further, slow growth in tax receipts has added to the picture, causing fiscal experts to seriously question the sustainability of our current fiscal policies in the years to come. Indeed, analysts had originally expected borrowing to be £15 billion at the end of October. This figure was a little higher than the Office for Budget Responsibility’s (OBR) previous forecast of £14.4 billion.
James Smith, an economist at Dutch investment bank ING, noted that these numbers are not likely to make Chancellor Reeves happy. She is preparing to make final her Executive Budget. He noted that her fiscal rules focus, much like OBR rules, on the long-term picture over the short-term financial squeeze.
“This only underscores the generally poor fiscal picture facing the chancellor as she looks set to tighten fiscal policy in the forthcoming Budget,” – Ruth Gregory, deputy chief UK economist at Capital Economics.
Chancellor Reeves has signaled an openness to both raising taxes and cutting spending. This collaborative approach is an appropriate response to the continuing imperative to address the expanding deficit. As she nears her first Budget announcement, the pressures of increasing local authority spending and flat tax revenues are very much at the front of her mind.
Sir Mel Stride, the new Shadow Chancellor, has highlighted the need for early action on these fiscal headwinds. He completely condemned the government’s handling of the situation. Instead of drastic tax increases, he suggested a more managed period of spending to lower the expected number of tax increases.
“If Labour had any backbone, they would control spending to avoid tax rises next week,” – Sir Mel Stride.
Additionally, October’s borrowing was the second highest ever recorded from April through October since the beginning of data collection in 1993. It was only topped by the exceptional numbers during the pandemic in 2020.
Chief Secretary to the Treasury James Murray expressed concern over how borrowing levels impact public services. He stated, “That money should be going to our schools, hospitals, police and armed forces,” indicating a pressing need to prioritize essential services amid rising costs.
Murray noted that the government has significantly boosted spending on public services and benefits since last October. He pointed out that this largely masked a far bigger increase in tax and National Insurance receipts. He maintained that it will be necessary to address these discrepancies in order to protect fiscal health for the future.
Ruth Gregory, from the Institute for Fiscal Studies, said that it all painted a “pretty grim picture.” At the same time, she noted, it “is not nearly as terrible as it appears to be.” What’s more, she identified rising local authority spending as “a major driver of the overshoot.” This trend poses significant hurdles for Reeves as she shapes her near-term fiscal agenda.