UK government borrowing overshoots expectations

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UK government borrowing sharply overshot expectations in February, according to official figures, underscoring the pressure on chancellor Rachel Reeves as she prepares for her Spring Statement next week. 

The shortfall between government income and spending was £10.7bn last month, the Office for National Statistics said. This compared with a forecast of £6.5bn from the Office for Budget Responsibility, the government’s fiscal watchdog, and a similar projection in a Reuters survey of economists. 

In the financial year to February, the deficit was £132.2bn, about £14.7bn more than at the same point in the previous fiscal year.

Reeves is preparing for a Spring Statement that will introduce a further squeeze on government spending as she attempts to keep the public finances on track. The chancellor has pledged under her fiscal rules to balance the current budget, which excludes government investment, by 2029-30. 

But the weak state of the economy and public finances mean forecasts from the OBR are expected to indicate that further spending restraint is required. The government has announced plans for welfare savings of £5bn a year, and is expected to unveil a fresh squeeze on departmental spending on Wednesday. 

The ratio of net government debt to GDP at the end of February was provisionally estimated at 95.5 per cent, the ONS said, 0.1 percentage points higher than a year ago. 

Darren Jones, chief secretary to the Treasury, said: “We’re refocusing the public sector on our missions and, for the first time in 17 years, going through every penny of taxpayer money line by line, to make sure it is helping us secure Britain’s future through the Plan for Change.   

“At the core of this urgent mission is sound public finances, based on our non-negotiable fiscal rules.”

Reeves exited her first Budget in October with headroom against her current deficit rule of £9.9bn, but that has been wiped away by rising government borrowing costs and flatlining growth. The chancellor will need to show plans to rebuild that headroom to convince financial markets that she is keeping the public finances in order. 

She has insisted that next week’s announcement will not constitute a major fiscal event, suggesting tax changes are off the table for now. But pressures including the need to increase defence spending and repair public services suggest she could be forced into further revenue-raising measures this parliament, economists warn. 

“Cost cutting can only go so far, and barring a surprise boost to UK growth this summer, we think further tax hikes look inevitable in the autumn,” said James Smith, an economist at ING.