(Bloomberg) -- UK government borrowing came in higher than forecast in the first five months of the fiscal year, keeping Chancellor Rachel Reeves under pressure to raise taxes to balance the books in her budget next month.
The deficit totaled £64.1 billion ($85.4 billion) between April and August — £6.2 billion more than the Office for Budget Responsibility expected in March. Last month the shortfall was £13.7 billion, £1.1 billion more than economists forecast and the third-highest August on record. The national debt hit 100% of GDP for the first time since 1961.
The figures are the penultimate snapshot of the public finances before Reeves delivers the first budget of the new Labour government on Oct 30. With strong growth in the first half failing the improve the fiscal position, the chancellor has warned that she will need to take difficult decisions on tax and spending.
The £6.2 billion borrowing overshoot in the first five months of the year was driven by higher spending on benefits and public-sector pay as well as the “increased running costs” of public services due to sticky inflation, ONS chief economist Grant Fitzner said.
Overall, tax receipts between April and August were £3.8 billion ahead of OBR forecasts but spending was £11.5 billion above expectations. The net overshoot of £7.7 billion was partially offset by the fiscal position of local governments.
“When we came into office, we inherited an economy that wasn’t working for working people. Today’s data shows the highest August borrowing on record, outside the pandemic,” said Chief Secretary to the Treasury Darren Jones. “We are now taking the tough decisions to fix the foundations of our economy, so we can rebuild Britain and make every part of the country better off.”
Reeves needs every penny she can find after giving public-sector workers a £10 billion pay rise and uncovering what she claims were £12 billion of unfunded spending commitments left by the previous government. She has hinted at tax increases and cuts to welfare to meet her fiscal rules, which require debt to be falling as a share of the economy in five years and day-to-day spending to be covered by tax revenue.
Labour’s warnings about the bleak state of the public finances and the “tough” choices needed are weighing on sentiment, with a key survey Friday showing consumer confidence falling in September at the fastest pace in two-and-a-half years.
Alex Kerr, UK economist at Capital Economics, said the borrowing figures were disappointing “but not as dire as the chancellor suggests.” Despite the overshoot, he said Reeves may have as much as £22 billion of headroom in the Autumn budget, £13 billion more than in March, “due to an improvement in the economic backdrop” and the rolling on of the five-year forecast by a year.
The central government net cash requirement, which helps determine the amount of debt the government needs to issue, was £98.1 billion in the first five months of 2024-25. The OBR had forecast £81.3 billion for the period.
--With assistance from Mark Evans and Joel Rinneby.
(Adds details, charts, comment)
©2024 Bloomberg L.P.
