(Bloomberg) -- UK government borrowing far overshot forecasts in October as public-sector pay rises awarded by Chancellor Rachel Reeves drove up spending, according to the first snapshot of the public finances since the budget.
In a setback for the new Labour government just weeks after announcing £40 billion ($50.6 billion) of tax rises to fix ailing public services, the budget deficit hit £17.4 billion, the Office for National Statistics said Thursday.
That was far higher than the £13.3 billion predicted by economists and the second-highest shortfall for the month since records began in 1993. It left borrowing in the first seven months of the fiscal year at £96.6 billion — £1.1 billion more than in the same period of 2023-24.
Reeves triggered a bond-market selloff after her Oct. 30 budget unveiled £142 billion of extra borrowing across the parliament to help fund investment and repair public services. For the current fiscal year, the new deficit forecast is £127.5 billion.
Despite the £10 billion cut in National Insurance in March, tax revenues were £2.9 billion higher than in October last year. Yet spending rose even faster. Pay rises and higher departmental running costs, alongside inflation-linked benefit increases and debt interest, added £3.9 billion to monthly spending. Pay rises alone added £2.2 billion to spending in October. Reeves’ tax rises will take effect from April.
The chancellor’s key rule is that day-to-day spending must be paid out of taxes in 2029-30. However, the rise in borrowing costs since the budget and economic headwinds amplified by Donald Trump’s return to the White House threaten to wipe out all of the slender £9.9 billion of headroom that Reeves was deemed to have. It means the chancellor may be forced to announce more tax rises or spending cuts in the spring.
The figures “underline the fiscal challenge that the chancellor still faces, despite the big increases in spending and taxes announced in the budget,” said Alex Kerr, UK economist at Capital Economics. Reeves has little “wriggle room” and may need to raise taxes if the rise in borrowing costs since the budget is sustained, Kerr added.
Responding to the ONS numbers, Chief Secretary to the Treasury Darren Jones said: “We inherited a £22 billion black hole in our public finances from the previous government. At the budget we addressed this, fixing the foundations and putting public finances on a sustainable footing to rebuild the country.”
Net debt stood at 97.5% of GDP in October, levels last seen in the early 1960s. However, the new Labour government is targeting a wider gauge of debt known as public sector net financial liabilities, with a goal to have it falling as a share of the economy by the end of the decade.
Last month, PSNFL, which counts a broader range of financial assets, was 83.7% of GDP, or £2.39 trillion. That’s 2.5 percentage points higher than a year earlier.
Total spending including investment has risen 3% so far this fiscal year, boosted by Pay Review Body wage settlements that were incorporated into the public finances in September and October, and are forecast to cost around £10 billion a year. Tax revenue has risen 3.4%, with strong gains across most categories of revenue. With employment growth slowing, income tax receipts are expected to slow.
The figures also showed the Treasury paid a further £7.5 billion to cover losses incurred as the Bank of England unwinds its vast crisis-era gilt portfolio. It brought the total cost since so-called quantitative tightening began in October 2022 to £80.6 billion.
Two-thirds of the £123.9 billion of profits made on the portfolio between 2009 and early 2022 have now been wiped out. The BOE forecasts QE to make a loss of more than £100 billion over its lifetime.
©2024 Bloomberg L.P.
