UK borrowing surges past official forecasts ahead of Budget

The challenge facing Chancellor Rachel Reeves ahead of her first Budget has been laid bare after figures revealed government borrowing in the financial year so far has surged past official forecasts.

The Office for National Statistics (ONS) said public sector net borrowing in the first half of the financial year stood at £79.6 billion – £1.2 billion more than a year earlier and £6.7 billion higher than forecast by the independent fiscal watchdog, the Office for Budget Responsibility (OBR).

The ONS said that government borrowing rose to £16.6 billion last month, up £2.1 billion year-on-year and marking the third highest September borrowing since records began as public sector pay hikes took their toll.

This came despite the first fall in central government benefit payments since early 2022, in part due to Labour’s decision to means test the winter fuel allowance, which is paid out in November and last year cost around £2 billion.

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Jessica Barnaby, ONS deputy director for public sector finances, said: “While tax revenue increased, this was outweighed by increased spending, partly due to higher debt interest and public sector pay rises.”

While the September figure is below the £17.5 billion pencilled in by most economists, the year-to-date overshoot of OBR forecasts presents a further headache for Ms Reeves ahead of next week’s Budget.

Treasury Chief Secretary Darren Jones said the state of the public finances meant there would be “tough choices” in the October 30 Budget.

Mr Jones said: “After 14 years in power the Conservatives left Britain broken. They crashed the economy and ran away, having wasted billions of pounds of taxpayers’ money on failed schemes, gimmicks and unfunded commitments.

“We have inherited a £22 billion black hole in the country’s public finances, including no plan to fund pay deals for millions of public sector workers.

“For too long the Conservatives failed to take the difficult decisions, choosing the snake oil of easy answers and false promises.

“This Labour Government promised change.

“Resolving this black hole at the Budget next week will require tough choices to fix the foundations of our economy and begin delivering on our promises to protect working people, fix the NHS and rebuild Britain.”

The ONS said public debt, excluding state ownership in banks, was estimated at 98.5% of gross domestic product (GDP).

But revisions to August figures meant debt levels did not reach 100% of GDP as first thought, standing at 98.8% for that month as borrowing was lower and GDP stronger than initially estimated.

Ms Reeves has signalled plans to announce changes in the upcoming Budget to the fiscal rules, which provide discipline on borrowing and spending, to allow her to borrow more to finance projects in sectors such as housing, roads and energy.

Experts said the rules will need to be changed as government spending soars but in a way that does not spook financial markets and risk a re-run of the mini-Budget meltdown caused by former prime minister Liz Truss.

The Resolution Foundation economic think tank said Government spending so far this financial year was £11.5 billion more than forecast by the OBR, which tallies with Ms Reeves’ claim of a £22 billion “black hole” in the public finances.

The foundation’s senior economist, Cara Pacitti, said: “Today’s data highlights the scale of the public finances challenges facing the Chancellor as she grapples with overspending today, the need to avoid austerity in the future, and having to fund extra public service spending through tax rises.”

Rob Wood, chief UK economist at Pantheon Macroeconomics, said he expects the Chancellor to target public sector net financial liabilities falling relative to GDP in five years, rather than public sector debt excluding the Bank of England.

He said: “Changing the fiscal rules in that way would give the Government about £50 billion additional headroom to borrow.

“We think markets will be unruffled by that change because boosting investment should raise GDP, making government borrowing more affordable.”