Recent figures indicate that government borrowing has surged more than anticipated in the lead-up to Labour’s budget presentation last month. This increase is primarily attributed to escalated spending on public sector wages and rising costs associated with debt interest.

Economists have cautioned that this trend could necessitate additional tax increases, as official statistics reveal that public sector borrowing reached £17.4 billion in October. This figure significantly surpasses the £12.3 billion forecast made by economists surveyed, and is also higher than the £16.1 billion projection by the Office for Budget Responsibility (OBR), the government’s independent fiscal watchdog.

The Office for National Statistics (ONS) reported that this borrowing total marks the second-highest recorded for October since the 1990s. The national debt ratio was calculated at 97.5% of GDP, while overall borrowing during the first seven months of the fiscal year climbed to £96.6 billion, exceeding last year’s figure by over £1 billion. On a positive note, borrowing figures from preceding months were downwardly revised by £300 million.

According to Alex Kerr, an economist at Capital Economics, “The figures from October highlight the limited flexibility the chancellor has for significantly boosting day-to-day spending. If further expenditure increases are desired, it will likely necessitate tax hikes as well.”

Labour officials have reported uncovering a £22 billion gap in unfunded spending plans for 2024-25 upon assuming office. This has compelled Chancellor Rachel Reeves to enact tax increases greater than previously anticipated, alongside cuts to programs such as winter fuel assistance for seniors. To address this shortfall and provide immediate funding for the NHS and other sectors, Reeves disclosed £40 billion in tax rises within the budget.

The ONS attributed the increase in government borrowing to heightened interest payments on the national debt, triggered by a rise in the retail prices index in August. In October, the Treasury expended £9.1 billion on debt interest, which is an increase of £500 million compared to the same month last year.

This borrowing increase also correlates with recent decisions to implement higher public sector wages, some reaching up to 6%, and the adjustment of welfare payments to align with inflation rates.

Total tax income saw an increase of £3.8 billion, totaling £61.3 billion, bolstered by a rise in corporation tax and income tax revenues. However, a reduction in national insurance contributions made earlier this year by the Conservatives has resulted in a £1.1 billion decrease in revenue.

Reeves has altered the government’s debt target strategy, shifting from a focus on public sector borrowing to a more comprehensive overview of the state’s financial standing. She has committed to borrowing solely for long-term investment rather than for everyday expenses. Currently, the government has less than £10 billion of headroom under her new fiscal regulations, making its financial plans susceptible to economic fluctuations or emergency spending which could compel additional tax increases.

Sandra Horsfield, an economist at Investec, remarked, “The pressure on public financial resources appears likely to persist unless the chancellor encounters unexpectedly favorable growth data, which could boost tax revenues in the future.”

Matt Swannell, an advisor to the EY Item Club, cautioned that sustained high market interest rates following the budget could deplete much of Reeves’s fiscal flexibility. He stated, “Ongoing spending demands are a primary factor in the increased borrowing compared to 2023-24.”

Elliott Jordan-Doak, a senior economist at Pantheon Macroeconomics, expressed concerns, noting, “There is still a risk that borrowing could exceed the higher forecasts provided in October. Gilt yields have notably risen since the budget was published, which means the chancellor will need a decrease in market interest rates to adhere to her borrowing guidelines.”

Darren Jones, the chief secretary to the Treasury, commented, “This government is committed to maintaining financial stability and our robust fiscal regulations will ensure that we reduce debt while fostering growth through investment.”