The newly appointed Chancellor, Rachel Reeves, faces challenging decisions as recent official data indicates that government borrowing in July reached £3.1 billion, significantly surpassing expectations. This figure is £1.8 billion higher than the previous year and marks the highest July borrowing since 2021, highlighting the difficult financial environment the Labour government must navigate.
According to the Office for Budget Responsibility (OBR), the increased borrowing is linked to the “strong growth in public sector pay” during the tenure of the previous Conservative government. Data from the Office for National Statistics reveals that central government spending on goods and services from April to July totaled £140 billion, representing a 5% increase compared to the same period in 2023 and exceeding the March budget forecast by £6 billion.
Isabel Stockton, a senior research economist at the Institute for Fiscal Studies (IFS), warned that the Chancellor may encounter tough choices in her first budget on October 30, despite better-than-expected growth figures. The combination of immediate spending pressures and ongoing challenges in public services suggests that the upcoming spending review for 2025-26 could prove particularly difficult.
Reeves has previously highlighted a £21.9 billion gap in public finances, attributing it to unfunded commitments left by the previous government. In response, she is reportedly considering several measures, including raising inheritance or capital gains tax, reducing funding for Whitehall departments, reconsidering the two-child benefit cap, and altering debt measurement methods.
The ONS data showed that public sector spending of £107.4 billion last month significantly exceeded receipts of £91 billion, despite July usually being a strong month for tax revenues. Public sector net debt, excluding state-owned banks, was estimated at 99.4% of gross domestic product (GDP) at the end of July, which is 3.8 percentage points higher than a year ago and at levels not seen since the early 1960s. Economists agree that Reeves will likely need to raise taxes and increase borrowing in the medium term to accommodate the rising expenditure on public services. The Chancellor has emphasized that “difficult decisions” are necessary to repair public finances after 14 years of slow economic growth under the Conservative government.
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