Government borrowing in the UK surged to £16.6 billion in September, exceeding expectations and putting additional pressure on Chancellor Rachel Reeves ahead of her first Budget next week.

According to figures from the Office for National Statistics (ONS), the deficit for September was up by £2.1 billion compared to the same month last year, marking the third-highest borrowing figure on record for the month. This increase brings total government borrowing to £6.6 billion more than the Office for Budget Responsibility (OBR) had forecast for the year so far, with a cumulative total of £73 billion.

The significant borrowing underscores the fiscal challenges facing the UK government as it grapples with high debt levels, rising interest rates, and growing public sector demands. The debt-to-GDP ratio reached 98.5% in September, the highest since the 1960s, driven largely by a sharp rise in debt interest payments, which totalled £5.6 billion for the month, up from £1 billion in September 2023.

Budget pressures and fiscal tightening

Chancellor Rachel Reeves is expected to announce £40 billion of fiscal tightening in her Autumn Budget, which will include a combination of tax increases and potential spending cuts to reduce the growing deficit. Speculation surrounds potential hikes in capital gains tax and the possibility of subjecting employers’ pension contributions to national insurance. This comes as the government aims to address the significant public sector debt while also laying out its long-term economic strategy.

The upcoming Budget will be Reeves’ first, making her the first female chancellor to deliver such an announcement in British history. The Budget follows a difficult start for the Labour government, which has faced internal disputes over policies such as the two-child benefit cap and backlash over reduced pensioner winter allowances.

Reeves and Prime Minister Sir Keir Starmer have both stated that Labour will need two full parliamentary terms to repair the UK’s public services and stimulate economic growth. The budget will likely be the first step in this longer-term vision, shaping the tax and spending policies for the next five years.

Growing debt interest and spending challenges

Debt interest payments have become a significant burden on the UK’s public finances due to rising interest rates. The £5.6 billion spent on debt interest in September alone reflects the growing challenge of managing public sector debt while meeting increased demands for public sector pay rises and other government spending.

Jessica Barnaby, deputy director for public sector finances at the ONS, commented: “Borrowing this month was about £2 billion up on last year, making this the third highest September figure on record. While tax revenue increased, this was outweighed by increased spending, partly due to higher debt interest and public sector pay rises.”

While the chancellor is expected to introduce tax rises, economists have argued that increasing public investment spending is necessary to stimulate growth. Reeves may also look to adjust how public debt is measured, potentially including the value of government assets in the debt definition. This could create an additional £50 billion in fiscal headroom, giving the government more flexibility in managing the budget.

Difficult decisions ahead

The scale of potential budget cuts has reportedly caused concern among some cabinet ministers, particularly over how departments like local councils might be affected. While the NHS is expected to see funding rise in real terms, other unprotected departments could face significant spending reductions as part of the government’s efforts to meet its fiscal targets.

The previous Conservative chancellor, Jeremy Hunt, left £8.9 billion of fiscal headroom following his March 2023 Budget. However, with the rising cost of debt and the need to stabilise public finances, the current Labour government faces tough decisions on how to balance spending cuts with the need for investment and public services reform.