Rachel Reeves is confronting a challenging fiscal landscape ahead of next month's budget, as September's public finances data revealed UK borrowing reached a five-year high of £20.2bn. The figures, published by the Office for National Statistics (ONS), showed the deficit for the first six months of the fiscal year stood at £99.8bn, £7.2bn higher than the Office for Budget Responsibility (OBR) forecast in March.
While the overshoot is narrowing—September's deficit was only £100m above OBR expectations—the data underscores the need for either substantial tax rises or spending cuts. The current budget deficit, a key measure for Reeves' fiscal rule of balancing day-to-day spending with tax receipts, ran at £71.8bn for the year so far, 17.2% higher than the same period last year.
Higher inflation and wage growth have boosted income tax receipts as more workers are pushed into higher tax bands, but this is offset by increased payments on inflation-linked government bonds. The ONS also noted that a correction in VAT estimates reduced the reported deficit by £4.2bn for the year to date, offering some modest relief.
The Treasury highlighted the International Monetary Fund's assessment that the UK is planning the largest primary deficit reduction in the G7 and G20 over the next five years. However, the consolidation is scheduled for later in the parliament, leaving the government with difficult choices on tax increases or spending restraint in cash-strapped departments.
Reeves has already seen the OBR's five-year forecasts, which will be used to judge her fiscal rules. The September data, while containing no major shocks, reinforces the scale of the challenge she faces in balancing the books without further eroding the government's popularity.
