Public debt has reached 100% of the economy for the first time since the 1960s, marking a significant milestone that highlights the challenge facing the Chancellor ahead of her fiscal statement on October 30.
Official data revealed that public borrowing this year is £6.2bn higher than anticipated, with debt now equal to the size of the economy. The Office for National Statistics (ONS) attributed the rise to increased spending on public services, including pay and benefits, with the government borrowing £13.7bn in August to cover the gap between taxes and spending. This figure exceeded the £11.2bn forecast by the Office for Budget Responsibility (OBR), marking the third-highest August borrowing since monthly records began in 1993.
The OBR stated that “higher-than-expected borrowing continues to be driven by departmental spending,” which is £8.5bn over budget. Total borrowing for the year now stands at £64.1bn, surpassing the OBR’s March forecast of £57.8bn by £6.2bn.
This overshoot occurred despite tax receipts exceeding official projections, largely due to a surge in VAT receipts, which have been bolstered by rising prices. These receipts are now £7.8bn higher than forecast for this fiscal year. However, self-assessment income tax receipts have fallen short for the second consecutive month, which economist Alex Kerr attributes to “weakness in employment growth this year.”
The rise in borrowing is linked to increased government spending, which the ONS notes has not yet accounted for the inflation-busting pay deals announced by Rachel Reeves shortly after taking office. These near £10bn pay deals are contributing to a £22bn deficit in public finances, exacerbated by significant departmental budget overspends that Reeves has attributed to the previous government.
Analysts suggest an improving economic outlook could provide Reeves with more flexibility to meet her fiscal rules, with speculation that she may revise these rules to create additional leeway. Additionally, a slowdown in the Bank of England’s bond sales next year could free up £10bn, which peers have urged the Chancellor to use to reverse cuts to winter fuel payments.
Alex Kerr noted that an improved economic backdrop since March and a five-year fiscal rule may give the Chancellor more room than the £8.9bn available at the March Budget, potentially up to £22bn. However, he predicts she may opt to reserve much of this headroom for future fiscal events, estimating that she will increase spending by £16bn annually and raise taxes by a similar amount to fund it.
Commenting on the figures, Darren Jones, Chief Secretary to the Treasury, stated: “When we took office, we inherited an economy that wasn’t working for working people. Today’s data shows the highest August borrowing on record, outside of the pandemic.
“Debt has now reached 100% of GDP, the highest level since the 1960s. With the £22bn deficit in public finances we inherited this year, we are making tough decisions to fix the economy’s foundations, so we can rebuild Britain and improve the lives of people across the country.”
