UK's rising debt cost puts Reeves and tax rises in spotlight
Figures from the Office for National Statistics (ONS) showed that public sector net borrowing reached £20.7bn in June — £3.5bn higher than the £17.1bn forecast by the Office for Budget Responsibility (OBR), and £6.6bn above the same month in 2024.
This was the second highest borrowing figure since monthly records began in 1993, after that of June 2020 during the COVID-19 pandemic.
The ONS said that the public sector had spent more than it received in taxes and other income so far in this financial year. Provisional estimates showed it borrowed £57.8bn over this three month period, which was £7.5bn more than the same period last year, but was in line with the latest OBR forecast. The UK statistics authority said the current budget deficit was £44.5bn in this period, which was £6.5bn more than the same three months in 2024 and was the highest since 2021.
Richard Heys, acting chief economist for the ONS, said: "The rising cost of providing public services and a large rise this month in interest payable on index-linked gilts pushed up the overall spending more than the increases in income from taxes and national insurance (NI) contributions, causing borrowing to rise in June."
Central government receipts rose by £5.7bn year-on-year to £86.8bn in June, boosted by a £1bn increase in income tax, £700m more in value added tax (VAT) and £500m in corporation tax receipts. An increase in employer NI contributions contributed to a £3.1bn rise in compulsory social contributions, bringing that total to £17.4bn.
However, provisionally estimates showed that government spending rose to £97.1bn in June, up by £12.4bn compared to the same month last year. An £8.4bn increase in government debt interest payable to £16.4bn was among the key drivers, along with rises in departmental spending and net social benefits.
Alex Kerr, UK economist at Capital Economics, said "total government expenditure came in £2.2bn above the OBR's forecast. That was due to hotter-than-expected retail prices index (RPI) inflation in Q2 pushing up debt interest payments to £16.4bn, £2.4bn above the OBR's forecast and to the second highest June total since monthly records [on government interest payments] began in 1997."
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The latest borrowing figures leaves the UK's net debt at 96.3% of gross domestic product (GDP), 0.5 percentage points higher than a year ago and among the highest levels recorded since the early 1960s.
Kerr said: "The government's U-turns on spending cuts and potential upward revisions to the OBR's borrowing forecasts means the chancellor will probably need to raise £15-25bn at the autumn budget to maintain the £9.9bn of headroom against her fiscal mandate.
"And given that she is struggling to stick to existing spending plans and we doubt the gilt market will tolerate significant increases in borrowing, she will probably have to raise taxes instead."
Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, said: "What we are very likely to see at the [autumn] budget is another set of tax rises. The freeze on income tax brackets will continue, effectively acting as a stealth tax on workers jumping tax brackets through inflation-level rather than real-terms pay rises.
"How else the chancellor raises funds is unclear, especially if she is to maintain her fiscal rules and the pre-election promise to not raise taxes on 'working people', although we have already seen a loosening of the meaning of that term."
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