Higher UK deficit piles pressure on finance minister before Budget
Speculation mounts over a possible series of tax increases to help shore up public finances and prop up worsening public services
THE UK posted a larger-than-expected government deficit in the first half of the fiscal year, increasing pressure on Chancellor of the Exchequer Rachel Reeves to raise taxes and borrow more to cover higher spending at the Budget on Oct 30.
Government borrowing between April and September was £79.6 billion (S$136.2 billion), a £6.7 billion overshoot compared to official forecasts, figures from the UK Office for National Statistics (ONS) showed on Tuesday (Oct 22).
September’s shortfall was £16.6 billion, below economists’ expectations for a £17.5 billion deficit, but still the third-highest borrowing on record for the month.
However, there was better news for Reeves on the total debt level after the ONS tweaked previous figures based on new gross domestic product estimates.
It means total government debt never surpassed the symbolic 100-per-cent-of-GDP milestone, as had been thought last month. Nevertheless, the ONS said it was at 98.5 per cent of GDP in September – still the highest since the early 1960s.
While the figures were too late to be incorporated into the forecasts from the Office for Budget Responsibility (OBR) alongside the Budget, they provided a gloomy final snapshot before Reeves delivers her fiscal plans.
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It has kept up the pressure on the new chancellor to raise taxes and borrow more in the coming years, to help cover higher spending aimed at funding public-sector pay hikes and delivering the Labour Party’s election pledges.
Reeves has set the scene for a belt-tightening Budget, after complaining of a dire fiscal inheritance from the previous Conservative Party government.
Speculation has mounted over a string of tax rises to help shore up the public finances and provide extra money to pump into deteriorating public services. The chancellor could also tweak her fiscal rules to allow for more borrowing to fund higher public investment.
Tuesday’s figures “highlight the limited scope the chancellor has to increase day-to-day spending without raising taxes”, said Alex Kerr, UK economist at Capital Economics. “That said, if she tweaks her fiscal rules, she will still have room to raise public investment.”
At the fiscal year’s mid-point, the borrowing overshoot has been driven by much higher spending than the OBR had predicted in March, even as tax receipts have risen.
Inflation resulting in higher running costs for the government, staff pay rises and a bigger benefits bill have contributed to the overspend. There was reduced spending on winter fuel payments, after the new government decided to remove the subsidy for all but the poorest pensioners.
The economy has performed better than many expected in 2024, even if the borrowing figures make for grim reading.
Reeves’ fiscal firepower will hinge on whether the OBR expects a brisk recovery from last year’s recession to continue, though the fiscal watchdog is already near the upper end of economists’ estimates.
It has been far more optimistic about the economy’s growth prospects than the Bank of England.
Following the figures, Chief Secretary to the Treasury Darren Jones sought to hammer home Labour’s messaging on its dismal inheritance, saying the previous government had “no plan to fund pay deals for millions of public-sector workers”.
He said fixing the fiscal black hole – estimated at £22 billion by the new government – will mean “difficult decisions” at next week’s Budget. BLOOMBERG
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