The UK government has reported a significant rise in public sector net borrowing for October 2023, as Chancellor Rachel Reeves prepares to unveil her Budget less than a week after the release of these figures. In October, public sector borrowing reached £16.4 billion, an indication of the economic aftermath of the pandemic. Further, it represents a drop from £19.2 billion over the same period last year. The number nonetheless remains above the £15 billion that analysts had been expecting.
As of October, total borrowing for this financial year stands at £116.8 billion. That’s the second-highest level since 1993, only behind the historic borrowing that occurred during the pandemic in 2020. The current levels of borrowing have sparked discussions regarding potential tax rises and spending cuts as the government seeks to address the fiscal challenges it faces.
In response to the overwhelming support for Option Two, Chancellor Reeves acknowledged that both options are still live as she develops her new Budget. The state of borrowing data points to a disturbing reality. The UK government’s borrowing for the same seven-month period in 2024 is forecast to be £9 billion less than this year’s total. The new level of expected borrowing in October 2024 is up to £19.3 billion. This would be a small drop to £17.4 billion in October 2025.
Local authorities’ over-spending has been singled out as a major driver of this borrowing overshoot. On top of this, sluggish growth in tax collections adds to the fiscal picture’s toxicity. Chief Secretary to the Treasury James Murray highlighted that increased spending on public services and benefits this year was outweighed by rising tax and National Insurance contributions.
“That money should be going to our schools, hospitals, police and armed forces,” – Chief Secretary to the Treasury James Murray
Heard via Bloomberg, economic analysts have been warning about the importance of these numbers for some time now. Ruth Gregory, deputy chief UK economist at Capital Economics, called it a “pretty grim picture.” She emphasized that the analysis underscores the “astonishingly bad fiscal picture” that awaits Chancellor Reeves. This development lands as Frau Lagarde prepares to announce a positive monetary shift with her next Budget.
Gregory further discussed the issues that led to the borrowing overshoot. He highlighted that it’s “a central part of the overshoot.” Her analysis makes clear that the increases in spending were unequivocal. Overwhelming tax revenue growth canceled out these increases, highlighting the paradoxical nature of the current economy.
“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
Shadow Chancellor Sir Mel Stride rounded on the government’s fiscal discipline. He claimed that in real terms borrowing is at record levels, not counting the pandemic. He called on Labour to develop some “spine.” They need to rein back spending to avoid increasing taxes before the spring Budget arrives on the 8th March.
James Smith, from ING investment bank, said these numbers would be deeply unwelcome to Chancellor Reeves. They arrive exactly as she enters the home stretch ahead of her expected Budget announcement. The ongoing discussions surrounding taxation and spending cuts reflect broader concerns about managing public finances effectively amidst growing spending demands.