If Rachel Reeves was looking for political cover for what is being billed as a budget of eye-watering severity, then the latest set of figures for the UK’s public finances certainly provided it.
The chancellor has been saying since arriving at the Treasury last month that the government has been spending and borrowing a lot more than expected – and the Office for National Statistics (ONS) has duly obliged with evidence to back up her case.
For a start, borrowing in July alone and in the first four months of the 2024-25 financial year has come in higher than the independent Office for Budget Responsibility (OBR) was expecting at the time of Jeremy Hunt’s March budget. The July figure of £3.1bn was £3bn higher than the OBR’s forecast, while the cumulative deficit was £4.7bn higher.
Second, most of the deterioration was on the spending side of the equation. Tax revenues were not quite as strong as the OBR predicted in March but were still £1.7bn up on July 2023. Receipts could well be revised up next month owing to delayed payments of self-assessed income tax and are looking reasonably healthy.
Public spending, even allowing for a smaller bill for debt interest payments, was £3.5bn higher last month than in July 2023. The ONS said this was partly owing to the impact of inflation and partly to higher pay awards. Reeves has added to that pressure by agreeing to meet the recommendations of public sector pay review bodies in full. Much of this year’s extra spending will recur in future years.
And third, the public finances would be looking healthier had it not been for Hunt’s decision to cut employee national insurance contributions in both last year’s autumn statement and this year’s budget. The reductions were the main reason why compulsory social contributions were £1.1bn lower at £13.8bn last month than a year earlier.
All this has implications for October’s budget. Back in March, the OBR said Hunt was on course to meet the government’s main fiscal rule – that debt should be falling as a share of national income within five years – with just £9bn to spare. That margin for error has now been trimmed and may disappear altogether.
Reeves could give herself some wiggle room by excluding losses from the government’s asset purchase facility – the buying and selling of bonds – from the way debt is calculated. Even so, tax increases in the budget targeted at the better-off seem inevitable. And, despite voter demand for better public services, next year’s Treasury spending review is also shaping up to be extremely tough.
