(Bloomberg) -- The UK posted a bigger government deficit than expected in the first half of the fiscal year, ratcheting up pressure on Chancellor of the Exchequer Rachel Reeves to raise taxes and borrow more to cover higher spending at next week’s budget.
Government borrowing was £79.6 billion ($103.6 billion) between April and September, a £6.7 billion overshoot compared to official forecasts, figures from the Office for National Statistics showed on Tuesday. September’s shortfall was £16.6 billion, below economists’ expectations for a £17.5 billion deficit but still the third-highest borrowing on record for the month.
However, there was better news for Reeves on the total debt level after the ONS tweaked previous figures based on new gross domestic product estimates. It means total government debt never surpassed the symbolic 100% of GDP milestone, as had been thought last month. Nevertheless, the ONS said it was at 98.5% of GDP in September, still the highest since the early 1960s.
While the figures are too late to be incorporated into the Office for Budget Responsibility’s forecasts alongside the Oct. 30 budget, they provided a gloomy final snapshot before Reeves delivers her fiscal plans.
It keeps up the pressure on the new chancellor to raise taxes and borrow more in the coming years to help cover higher spending to fund public sector pay hikes and the delivery of Labour’s election pledges. Reeves has set the scene for a belt-tightening budget after complaining of a dire fiscal inheritance from the previous Conservative government.
Speculation has mounted ahead of the budget over a string of tax rises to help shore up the public finances while providing extra money to pump into deteriorating public services. Reeves could also tweak her fiscal rules to allow for more borrowing to fund higher public investment.
Tuesday’s figures “highlight the limited scope the chancellor has to increase day-to-day spending without raising taxes,” said Alex Kerr, UK economist at Capital Economics. “That said, if she tweaks her fiscal rules, she will still have room to raise public investment.”
At the half-way point of the fiscal year, the borrowing overshoot has been driven by much higher spending than the OBR had predicted back in March, even as tax receipts have risen.
Inflation resulting in higher running costs for the government, staff pay rises and a bigger benefits bill have contributed to the overspend. There was reduced spending on winter fuel payments after the new government decided to remove the subsidy for all but the poorest pensioners.
While the borrowing figures make for grim reading, the economy has performed better than many expected in 2024. Reeves’ fiscal firepower will hinge on whether the OBR expects a brisk recovery from last year’s recession to continue, though the fiscal watchdog is already near the upper end of economists’ estimates. It has been far more optimistic about the economy’s growth prospects than the Bank of England.
Following the figures, Chief Secretary to the Treasury Darren Jones sought to hammer home Labour’s messaging on its dismal inheritance, saying the previous government had “no plan to fund pay deals for millions of public sector workers.” He said fixing the fiscal black hole — estimated at £22 billion by the new government — will mean “difficult decisions” at next week’s budget.
(Updates with details, comments from economist, minister starting from third paragraph.)
©2024 Bloomberg L.P.