UK government borrowing rose to £16.6bn in September, beating expectations and putting additional pressure on Chancellor Rachel Reeves ahead of her first Budget next week.
According to figures from the Office for National Statistics (ONS), the deficit for September rose by £2.1 billion compared to the same month last year, the third highest borrowing figure on record for the month. The increase takes total government borrowing to £6.6 billion, more than the Office for Budget Responsibility (OBR) has forecast for the year so far, with a cumulative total of £73 billion.
The large borrowing highlights the fiscal challenges facing the UK government as it grapples with high debt levels, rising interest rates, and growing public sector demands. The debt-to-GDP ratio reached 98.5% in September, the highest since the 1960s, driven largely by a sharp rise in debt interest payments, which totaled £5.6bn for the month, up from £1bn in September 2023. .
Budgetary pressures and fiscal tightening
Chancellor Rachel Reeves is expected to announce a £40bn fiscal tightening in her autumn budget, which will include a mix of tax rises and potential spending cuts to reduce the growing deficit. Speculation surrounds potential increases in capital gains tax and the possibility of employer pension contributions being subject to National Insurance. This comes at a time when the government aims to address the large debt of the public sector while developing its long-term economic strategy.
The upcoming Budget will be Reeves’ first, making her the first chancellor to make such an announcement in British history. The budget follows a difficult start for the Labor government, which has faced internal disagreements over policies such as the two-child benefit cap and a backlash over cuts to winter bonuses for pensioners.
Reeves and Prime Minister Sir Keir Starmer have stated that Labor will need two full parliamentary terms to reform the UK’s public services and stimulate economic growth. The budget is likely to be the first step in this long-term vision, by shaping tax and spending policies for the next five years.
Growing debt interest and spending challenges
Debt interest payments have become a significant burden on UK public finances due to rising interest rates. The £5.6 billion spent on debt interest in September alone reflects the growing challenge of managing public sector debt while meeting growing demands for public sector pay rises and other government spending.
Jessica Barnaby, deputy director of public sector finance at the Office for National Statistics, commented: “Borrowing this month was almost £2 billion higher than last year, making this the third highest figure on record for September. While tax revenues increased, increased spending was overshadowed by This is partly due to higher debt interest rates and higher public sector salaries.
While the Finance Minister is expected to introduce tax increases, economists believe that increasing public investment spending is necessary to stimulate growth. Reeves may also look to tweak how public debt is measured, including the value of government assets in the definition of debt. This would create an additional £50 billion of fiscal headroom, giving the government more flexibility in managing the budget.
Difficult decisions in the future
The scale of potential budget cuts has reportedly raised concern among some ministers, particularly about how departments such as local councils will be affected. While the NHS is expected to see an increase in funding in real terms, other unprotected departments may face significant spending cuts as part of the government’s efforts to meet its financial targets.
The former Conservative chancellor, Jeremy Hunt, left £8.9bn of fiscal headroom following his Budget in March 2023. But with the cost of debt rising and the need to stabilize public finances, the current Labor government faces difficult decisions about how to balance spending cuts with the need to reform investment and services. Public.