(Bloomberg) -- UK government borrowing is on track to overshoot official forecasts this year, raising the risk that Chancellor of the Exchequer Rachel Reeves will have to come back for more money early next year.
The Office for Budget Responsibility said the £113.2 billion ($142 billion) budget deficit in the first eight months of the fiscal year was £2 billion higher than the forecasts it published in October alongside the budget.
Although the miss is small, Reeves has just £9.9 billion of headroom against her main fiscal rule that she cannot borrow for day-to-day spending in 2029-30. The chancellor is also facing headwinds from higher government borrowing costs and weaker growth since the budget.
“The weakening in the economy and recent rises in market interest rates suggests the government will still struggle to bring the deficit down as quickly as planned,” said Capital Economics Deputy Chief Economist Ruth Gregory. “That raises the chances that extra revenue-raising tax hikes or spending cuts will be required.”
The chancellor raised taxes by £40 billion in October to fix the UK’s ailing public services and has signalled she will fill any further shortfall should one emerge at the OBR’s next forecast on March 26. She has ruled out tax rises, which leaves departments and welfare at risk of cuts.
The borrowing overshoot for the year to date, coming just a month and a half after the OBR’s new forecasts, overshadowed a welcome improvement in the public finances for the month of November alone. Lower inflation reduced debt-interest payments due to the impact on index-linked gilts.
The budget deficit totalled £11.2 billion ($14 billion), down £3.4 billion from a year earlier, the Office for National Statistics said Friday. It was the smallest November shortfall for three years and below the £13.6 billion economists were expecting.
However, the ONS said there had been a £5.3 billion increase in borrowing estimates for the prior seven months of the fiscal year due to more accurate pensions and local government data, lifting total borrowing for the year to date to £113.2 billion. It also revised up its estimates for 2023-24 by £6.3 billion on the back of higher local government and pensions spending.
Slowing growth has cast doubt over whether the chancellor can keep the deficit in 2024-25 as a whole to the £127.5 billion forecast by the OBR in October.
The Bank of England now expects zero growth in the fourth quarter after GDP unexpectedly shrank in October and surveys revealed mounting business concerns over the big tax rises announced in the Oct. 30 budget. Retail sales figures published Friday also disappointed.
The chancellor’s key rule is that day-to-day spending must be paid out of revenue in 2029-30. Market interest rates have also moved against her since the budget, when Reeves unveiled £142 billion of extra borrowing across the parliament to help fund investment and repair public services.
The modest improvement over the month came as the cost of servicing the national debt in November dropped by £4.7 billion, with a fall in the retail prices index in September cutting the cost of inflation-linked bonds that make up around a quarter of the total debt stock.
Salaries were £2.4 billion higher than the same month a year earlier after a series of public-sector pay rises and welfare spending increased by £1.2 billion. Taxes were up £3.2 billion, largely due to levies on income and wealth despite the cut in payroll taxes for employees by the former Conservative government earlier this year.
Net debt stood at £2.82 trillion, 98.1% of GDP in November, levels last seen in the early 1960s. However, the Labour government is targeting a wider gauge of debt known as public sector net financial liabilities, with a goal to have it falling as a share of the economy by the end of the decade. Last month, PSNFL was 84.6% of GDP, or £2.43 trillion. That’s 2.2 percentage points higher than a year earlier.
--With assistance from Mark Evans and Joel Rinneby.
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