Surge in government borrowing raises threat of more Reeves tax hikes, economists warn
A sharp rise in government borrowing costs fuelled by pay rises for public sector workers and rising debt payments has raised the threat of future tax hikes, according to economists.
Borrowing rose to £17.4bn last month, marking the second highest October figure since monthly records began, according to official figures.
The Office for National Statistics (ONS) said public sector net borrowing was £1.6bn higher than the same month last year. It came amid the first set of borrowing figures since the Government announced significant spending measures in last month’s autumn Budget.
The surge in borrowing will pose fresh headaches for the government and Rachel Reeves in a week when inflation numbers outstripped the Bank of England’s target and rate-setters warned they will be forced to take a more gradual approach to easing borrowing costs.
While the latest government borrowing figures cover the weeks running up to the Budget on 30 October, the Chancellor will now face questions over her fiscal plans and she could be forced to consider more tax increases in future, according to economists at Capital Economics.
“October’s disappointing public finances figures underline the fiscal challenge that the Chancellor still faces, despite the big increases in spending and taxes announced in the Budget,” said Alex Kerr, an economist at the research firm.
“And while the Chancellor has downplayed the chances of further tax-raising measures, if she wants to increase day-to-day spending in future years, she may need to raise taxes to pay for it.”
At the heart of the rise in borrowing was a lift in the cost of servicing government debt and a surge in public sector pay.
The ONS said central government departmental spending on goods and services increased by £2.5bn to £36.9bn in October on the back of “pay rises and inflation increased running costs”.
This includes the impact of above-inflation pay deals which were announced after the Labour Government took office in July, with NHS staff and teachers pocketing backdated pay increases from last month.
“The bulk of the extra spending came from higher expenditure on goods and services, in turn attributed not just to inflation but also to public-sector pay rises,” said Sandra Horsfield, an economist at Investec.
“On a monthly basis, current expenditure on goods and services is certainly volatile, even in year-on-year comparisons. Nevertheless, it is noteworthy that the trend since May has been for higher year-on-year spending growth in this category, in an environment where inflation itself has fallen.”
Since her maiden Budget on 30 October, the Chancellor has insisted she will not raise taxes further or borrow more even if tax revenue falls short of projections, but economists at the IFS warned that if the government doesn’t “get lucky” on growth they may be forced to raise additional revenue.
Darren Jones, chief secretary to the Treasury, said: “This government will never play fast and loose with the public finances.
“Our new robust fiscal rules will deliver stability by getting debt down while prioritising investment to deliver growth.”