Rachel Reeves admitted the economy is ‘not working as it should’ today as government borrowing hit a new high.
With a grim Budget looming, public sector net borrowing for last month came in at £20.2billion, £1.6billion higher than the same period a year earlier.
It has only been worse in September 2020 when the country was burning through money to deal with the pandemic. The Tories warned the situation is ‘spiralling out of control’, with alarm that borrowing will come in £10billion higher than forecast this year.
At a conference in Birmingham, the Chancellor acknowledged that ordinary Brits and businesses were suffering – but denied the economy is ‘broken’.
Despite saying people felt they were ‘putting more in’ and getting ‘less out’ of the state, she stoked fears she will raid the ‘rich’ and pensioners.
‘At the Budget last year we fixed the foundations of our economy, returned stability to our economy,’ she said.
‘And at the Budget next month we will take the necessary steps to secure those foundations and that stability for the future.
Labour MPs have been clamouring for ‘wealth taxes’ to fill the gap in the finances and fund more spending.
Analysts had pencilled in £20.8billion of borrowing in September, but the Treasury’s OBR watchdog predicted a lower level of £20.1billion.
Rachel Reeves was hit with more bad news today as government borrowing hit a new September record outside of Covid
Analysts had pencilled in £20.8billion of borrowing in September, but the Treasury’s OBR watchdog forecast a lower level of £20.1billion
The grim official figures heap pressure on the Chancellor as the Budget looms, with fears she will hammer the ‘rich’ with another wave of tax hikes
Borrowing – the difference between public spending and tax income – was nearly £100 billion between March and September, the second-highest amount since monthly records began in 1993.
Worryingly for Ms Reeves the figure is already £7.2billion higher than the OBR anticipated for this point in the year. Experts believe it could end up about £10billion more in 2025-26 than was expected in March.
ONS chief economist Grant Fitzner said: ‘Last month saw the highest September borrowing for five years. Debt interest, the cost of providing public services and benefits all increased compared with last year, more than offsetting the rise in receipts from central government taxes and National Insurance contributions.
‘Likewise, the first six months of the financial year saw the highest overall deficit since 2020.’
Addressing the Regional Investment Summit in Birmingham, Ms Reeves said: ‘Our economy is not broken but I do accept that for too many people it’s not working as it should.
‘Bills are too high. Businesses often don’t have the tools that they need to succeed, and people are feeling that they put more in, but they’re getting less out.
‘That has to change. At the Budget last year we fixed the foundations of our economy, returned stability to our economy.
‘And at the Budget next month we will take the necessary steps to secure those foundations and that stability for the future.
‘It is a future that we must build, and we will build, hand-in-hand with business, setting direction through our modern industrial strategy and our 10-year infrastructure strategy, a new relationship between business and Government to tackle barriers to our competitiveness and to provide certainty for investment.’
Nick Ridpath of the Institute for Fiscal Studies (IFS) think-tank said: ‘Today’s data show that over the first half of the year, government borrowing has exceeded the OBR’s March forecast.
‘This is in spite of the size of the economy exceeding expectations – especially its cash size, as inflation has remained high.
‘We would ordinarily expect this to come with higher tax revenues, but this fiscal upside has not materialised, at least so far.
‘This data will be revised and revised again, and we should avoid jumping to firm conclusions based on noisy monthly data releases.
‘But if this pattern persists – and economic growth delivers less tax revenue than we’d otherwise expect – it could worsen the fiscal arithmetic facing the Chancellor at November’s Budget, and beyond’.
Debt interest has been one of the factors adding to the government’s borrowing challenge
Andrew Wishart, an economist at Berenberg, said higher spending and borrowing would put the Chancellor off-track for her target of funding current spending entirely with tax revenue by 2029-30.
‘Getting back on track to meet this target will likely require about £25billion of tax hikes and/or spending cuts in the 26 November budget with another £10billion necessary to build a reserve for unexpected shortfalls, similar to the £10billion margin that was included in the March 2025 budget,’ he said.
John Wyn-Evans, Head of Market Analysis at Rathbones, said: ‘The latest public sector borrowing figures continue to show strain on the country’s finances…
‘When we factor in the probable downgrade to long-term growth estimates from the OBR which will inform the Chancellor Rachel Reeves’s Budget decision-making, it looks as though taxes will need to rise somewhere in the order of £25bn or more.
‘Much as many would like that number to be lowered by spending cuts, the mood within the Labour Party does not appear to support much hope on that front.’
Nigel Green, chief executive of global financial advisory giant deVere Group, warned that pensions could be in Ms Reeves’ crosshairs.
‘Borrowing has surged far beyond expectations while growth remains flat and debt servicing costs are swallowing a larger share of national income,’ he said.
‘When the Treasury finds itself under this kind of pressure, pensions are often first in line. They’re seen as an easy source of revenue that can be tapped quickly, even if the long-term consequences are severe.’
He added: ‘From frozen allowances to lifetime limit changes, history shows that pensioners are the easiest targets.
‘The political calculation is that they’re less likely to shift their financial arrangements or take to the streets, but that calculation underestimates how much confidence and capital are destroyed in the process.’
