Rachel Reeves faces gloomy autumn after borrowing overshoots

The Guardian

6 days ago

June's public finances data, published on Tuesday, make a depressing end-of-term report card for Rachel Reeves, as MPs prepare to depart Westminster for the summer recess.
The Office for National Statistics (ONS) said public borrowing jumped to £20.7bn last month – a full £3.5bn higher than expected by the independent Office for Budget Responsibility (OBR).
That made it the second-highest figure for any June on record, aside from in the Covid-hit year of 2020, when the government was paying millions of workers' salaries through the furlough scheme.
The current deficit for the month, which Reeves watches closely, as her key fiscal rule aims to eliminate it in five years' time, was £16.3bn – £7.1bn more than the equivalent month in 2024.
The overshoot appears to have been driven not so much by a spendthrift Labour Treasury, but by higher-than-expected interest costs for government bonds, or gilts, some of which rise automatically with inflation, as measured by the traditional retail prices index (RPI).
Inflation has been climbing in recent months, hitting 4.4% on the RPI measure. The Treasury paid £16.4bn in interest on gilts in June, the ONS said – almost twice the £8.4bn of the same month a year ago, and £2.4bn more than the OBR expected.
The news doesn't look nearly so bad when the first three months of the new financial year are taken as a whole, however – the ONS says the £57.8bn of borrowing over this period is in line with what the OBR forecast in March.
That suggests, at least, that the watchdog need not start its autumn budget forecast from a baseline that has already drifted way out of line with its March expectations.
But the worse-than-expected June figure underlines how delicate the chancellor's situation remains, with headroom of just £9.9bn at the end of the five-year forecast period, according to the OBR – some of which has already been eaten up by the reversal of the £5bn disability benefits cuts, and the £1.25bn cost of restoring the winter fuel allowance to most pensioners.
Potentially much larger than that is the impact of the OBR's summer forecast 'stocktake', which will revisit its economic modelling and could result in significant revisions, perhaps of £10bn or even £20bn according to some forecasters, which Reeves will then have to contend with in the autumn.
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The Institute for Fiscal Studies suggested a shift to Reeves's framework on Monday that would free her from the need to adjust policy in spring statements, in response to relatively small swings in forecasts.
The chancellor's team are considering the role of the OBR forecasts, and this kind of change could help to avoid a repeat of the hasty target-driven policymaking that ultimately led to the welfare U-turn.
But none of it appears likely to rescue the chancellor in time for what looks likely to be a very tough budget in the autumn – made no easier at all by the worse-than-expected state of the public finances for June.