UK government borrowing rose to £20.5 billion in April, its highest level in three years. This increase was driven by a growing benefits bill and a decline in tax revenues following reductions in National Insurance contributions.
Official figures from the Office for National Statistics (ONS) revealed that borrowing exceeded both the £19.3bn expected by economists and the Office for Budget Responsibility (OBR) forecast of £19bn. The Office for National Statistics highlighted that the government spent more than it earned in April, with a significant £2.1 billion increase in social care spending due to the annual rise linked to inflation at the start of the new financial year.
In addition to rising social care costs, departmental spending increased by £2 billion due to higher operating expenses due to inflation. The government's decision to cut National Insurance by two percentage points, from April, further impacted revenues, reducing National Insurance contributions by £1.5 billion. This was the second reduction in four months.
Chancellor Jeremy Hunt had hinted at the possibility of another reduction in the National Insurance rate this year. However, the International Monetary Fund has warned against the move, highlighting the potential cost to public finances. The International Monetary Fund suggested on Tuesday that any new government would need to raise taxes or cut spending by about £30 billion to reduce debt over the next five years. Both the Labor and Conservative parties pledged to adhere to the current fiscal rule to reduce the debt ratio during the next parliamentary session.
The Office for National Statistics reported that the debt ratio was 97.9% of GDP in April, slightly better than expectations of 98.1%. However, these numbers are provisional and subject to revision based on more precise estimates of tax revenues and government spending.
Grant Fitzner, chief economist at the Office for National Statistics, said: “While central government spending and overall income were up at this time last year, the significant fall in National Insurance contributions meant that revenues were not growing as quickly as spending. The decline in spending was offset by Energy support through increases in interest spending from the annual assessment.
For the financial year ending March 2024, the total borrowing bill is now expected to reach £121.4 billion, exceeding the Office for Budget Responsibility's forecast of £114 billion. This overrun highlights ongoing fiscal challenges as the government faces increasing spending pressures and declining tax revenues.