Chancellor Rachel Reeves has suffered another blow after unexpectedly high borrowing figures led to warnings that tax rises in November’s Budget now look “inevitable”.
The highest August borrowing for five years outstripped predictions at £18bn, £3.5bn more than in August 2024, according to the Office for National Statistics (ONS).
Soaring interest on government debt also wiped out any boost from Ms Reeves’s controversial national insurance tax raid unveiled at last year’s Budget, according to the ONS.
Martin Beck, chief economist at research and policy firm WPI Strategy, said: “The £10bn buffer the chancellor pencilled in against her key fiscal rule in March has almost certainly gone. That means tax rises in November look inevitable.”
The chancellor has already admitted that the economy is “not working well enough”, as she pledged to get a “tight grip” on spending when she delivers her budget on 26 November.
Even before this latest blow, The Independent was told she is considering a new tax raid by raising capital gains tax and introducing a gambling levy to help close an estimated £40bn black hole in her budget.
Russ Mould, investment director at AJ Bell, said: “Alarm bells are ringing in the Treasury after new figures showed public finances to be in a worse state than expected. That’s saying something, given expectations were already rock bottom.”
He added: “It makes chancellor Rachel Reeves’s job of plugging the black hole even harder and raises the likelihood of a swathe of uncomfortable decisions at November’s Budget.”
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said the borrowing figures for the year to date were “ugly” and meant the task facing Ms Reeves was now far worse.
He said: “Today’s figures suggest the chancellor will need to raise taxes by more than the £20bn we had previously estimated.
“We still expect the chancellor to fill the fiscal hole with a smorgasbord of stealth and sin tax increases, along with some smaller spending cuts.”
The new figures show the highest August borrowing since 2020, significantly overshooting the £12.8bn expected by most economists. Crucially, it was also £5.5bn higher than forecast by the UK’s independent fiscal watchdog, the Office for Budget Responsibility (OBR), in March.
Predictions later this year from the OBR on the state of the economy will tell Ms Reeves how much room for manoeuvre she has at the Budget.
James Murray, chief secretary to the Treasury, insisted the government “has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest”.
“Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms and putting more money in working people’s pockets,” he said.
The ONS said its estimates for borrowing in recent months had been revised higher by almost £6bn after it found VAT receipts were lower than first thought.
Over the summer, the National Institute of Economic and Social Research, a leading economic think tank, warned that Ms Reeves faces an “impossible trilemma” and must raise taxes or tear up her flagship borrowing rules to fill a £50bn black hole left by Labour U-turns, higher borrowing and sluggish economic growth.
The government’s embarrassing climbdown on planned welfare cuts saw Labour’s benefits reforms gutted almost entirely, with savings from the bill slashed from £5bn to nothing.
