The UK government’s public sector net borrowing reached £17.4 billion in October 2023, a figure that has surpassed analysts’ expectations of £15 billion. This represents a drop from the £19.2 billion posted in the same month last year. It nevertheless sets off alarm bells as the country continues to wrestle with an accelerating public sector spending wave and a painfully slow revenue collection increase. Meanwhile, BEIS Chancellor Rachel Reeves is preparing to reveal her own Budget in the coming weeks. She’s seriously weighing tax hikes and spending reductions, with an eye on a burgeoning long-term deficit.
In the fiscal year to this October, total UK government borrowing now stands at £116.8 billion. This is a £9 billion improvement versus the same seven months of 2024, reflecting continuing improvement in the fiscal picture. The net effect is that the total borrowing is still the 2nd largest on record going back to 1993, after only the historic levels of borrowing during the COVID-19 pandemic in 2020.
In October 2024, the public sector net borrowing was £19.3 billion. Looking further ahead, it is forecast to fall to £17.4 billion by October 2025. The most important factor behind the current overshoot in government borrowing is increased local authority spending. Even worse, the anemic growth in tax receipts has added to these fiscal pressures.
Analysts have written about the public service / benefits spending bump since last October. This growth has been overtaken by the receipts growth from income tax +NI.
“While spending on public services and benefits were both up on October last year, this was more than offset by increased receipts from taxes and National Insurance contributions,” – Chief Secretary to the Treasury James Murray
Ruth Gregory, deputy chief UK economist at Capital Economics, called the state of the current fiscal outlook a “pretty grim picture.” She argued that this increased expenditure by councils is “just a fundamental driver of the overshoot.” This indeed foreshadows the difficult fiscal hand Chancellor Reeves will soon inherit as she looks to clamp down on the purse strings further in her Autumn Statement.
“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
Chancellor Reeves has already said that tax increases will be needed to ‘repair the country’s finances’. He called for significant cuts to other spending areas to underwrite this fundamental tax reform. These discussions take place at a moment where the public is wary of new taxes and spending.
Shadow Chancellor Sir Mel Stride criticized the government’s approach, suggesting that if Labour had “any backbone,” they would prioritize controlling spending to prevent further tax increases next week.
“If Labour had any backbone, they would control spending to avoid tax rises next week,” – Shadow Chancellor Sir Mel Stride
Even with these challenges, some analysts say the state of affairs could be less bleak than it seems at first blush. Gregory suggested that the national fiscal picture isn’t quite as bad as it looks.
“It isn’t quite as bad as it looks,” – Ruth Gregory
As the UK Government continues to climb over these fiscal obstacles, every fiscal watchful eye will be focused sharply on Chancellor Reeves’s adverse future Budget statement. Stakeholders are keenly awaiting strategies that will address public concerns over borrowing while ensuring essential services receive adequate funding.