Rachel Reeves’s new £15bn headache
Government borrowing for the 2024/25 financial year has come in billions of pounds higher than was forecast by the official Budget watchdog recently
Rachel Reeves has been dealt a fresh blow after it emerged that the Government has been borrowing billions of pounds more than previously thought.
Public-sector borrowing for the 2024/25 financial year – the difference between the amount spent by the state and the total value of taxes received – came in at £152bn, according to the Office for National Statistics (ONS).
That is nearly £15bn higher than the Office for Budget Responsibility (OBR) forecast as recently as March.
The shortfall increases the risk that the Chancellor will need to raise taxes or cut public spending at the next Budget in the autumn, to avoid breaching her self-imposed borrowing rules.
The OBR said that the black hole in the public finances came from lower-than-expected tax receipts as the economy slowed, as well as slightly higher spending and an increase in the amounts borrowed by local councils.
What options does Rachel Reeves have now?
In response to the ONS data, the influential Institute for Fiscal Studies warned that there was a high chance Reeves would need to reduce borrowing at the Budget.
Research economist Nick Ridpath said: “Today’s data show higher-than-expected Government borrowing over the last financial year, including higher than was forecast in the Spring Statement just last month. And it is much higher than was forecast in the March 2024 Budget.
“This serves to highlight the uncertainty surrounding these – or indeed any – fiscal forecasts. The Chancellor’s fiscal rules which apply to forecast borrowing in 2029–30 are only being met by a hair’s breadth. Today’s data highlight the clear risk that is being taken with that strategy.”
Reeves left herself “headroom” – the difference between the amount being borrowed over the next five years and the maximum allowed under her rules – of £9.9bn at the Spring Statement, which is unusually low by historical standards.
Independent economists suggested that a combination of new tax hikes and further squeezes on public spending could be announced at the Budget, particularly if Donald Trump’s tariff war hits the UK economy.
Elliott Jordan-Doak of Pantheon Macroeconomics said: “The public finances were already in a difficult position heading into the trade war, and we think both taxes and borrowing will need to be raised in the October Budget.”
Ruth Gregory of Capital Economics added: “All of this means that Reeves may not be too far away from having to raise money again in the autumn Budget, by cutting spending and/or raising taxes, to meet her fiscal rules.”
Because of the five-year timeframe for calculating the fiscal rules, it is not possible to predict precisely what the knock-on effect of one year’s borrowing will be for the OBR’s forecast.
Options for tax increases could include higher levies on pension pots, a rise in inheritance tax and extending the freeze on income tax thresholds. The Chancellor has promised not to raise the rate of income tax, national insurance, VAT or corporation tax.
Any further cuts to spending would probably not take effect until 2029 at the earliest, but would put pressure on public services in the long term.
Darren Jones, the Chief Secretary to the Treasury, said: “Economic stability is crucial within a changing world. We will never play fast and loose with the public finances, that’s why our fiscal rules are non-negotiable and why we are going through every penny of taxpayer money spent, line by line, for the first time in 17 years to tear out waste.”
Conservative shadow Chancellor Mel Stride responded: “This morning’s figures lay bare the price the British people are paying for Rachel Reeves’s choices. By fiddling the fiscal rules, increasing borrowing by £30bn a year and piling up debt – these figures are alarming but not surprising.”
Liberal Democrat Treasury spokesperson, Daisy Cooper MP, said: “This is a damning set of figures that should be ringing alarm bells inside the Treasury.
“After years of Conservative economic vandalism, the Labour government has completely failed to bring debt under control with a series of blundering missteps. It is time for the Chancellor to accept that her policies have failed and to urgently change course.”
