Public debt passed £3 trillion in September and debt interest hit a record for the month, the Office for National Statistics says. A £4bn downward revision to earlier months narrowed the overshoot; economists still put the Chancellor’s room for manoeuvre at between £12bn and £20bn.
Chancellor John Healey goes into next Wednesday’s Budget with borrowing still running above the official forecast and debt at a new high. The public sector borrowed £24.5bn in September, £1.9bn more than the Office for Budget Responsibility (OBR) forecast in March and £1.8bn more than a year earlier, the ONS said on 21 October.1 Over April to September it has borrowed £97.8bn, £4.4bn less than a year earlier but £6.0bn above the forecast.1
Public sector net debt passed £3 trillion for the first time, reaching £3,005bn.1 That is a milestone in cash, not in the economy’s ability to carry it: at 94.0% of national income, debt is 0.7 percentage points lower than a year ago, because the economy’s value in cash terms has grown faster.1 Greg Thwaites of the Resolution Foundation put the political point more bluntly: “Borrowing is already off track this year, debt has hit £3 trillion”.6
The picture has also moved since Noodle News’s 11 October report, when borrowing was £8.1bn above forecast after August. The gap is now smaller, and not because September was good. It was worse than forecast. The ONS cut its estimate for April to August borrowing by £4.0bn, from £77.3bn to £73.3bn, mostly because it now estimates £3.5bn more tax was collected.12
The ONS says spending grew faster than receipts, with debt interest higher “partly reflecting the impacts of inflation”.1 Central government debt interest was £10.9bn in September, up £1.6bn on a year earlier and the highest September figure since records began in 1997. About £4.0bn of it was the uplift to index-linked gilts, whose value follows the Retail Prices Index, which rose 0.6% between June and July.1 Net social benefits rose 5.3% on the year in September, which the ONS links to inflation-linked benefit increases and earnings-linked State Pension rises.1
The underlying driver is energy. The Resolution Foundation attributes the squeeze to the Middle East conflict, which has pushed up energy prices and borrowing costs together; in September it calculated that higher inflation’s effect on debt interest and benefits accounted for £4.5bn of a £6.3bn spending overshoot at that point.34 Healey has said much the same, blaming conflicts in the Middle East and Europe for the rise in prices. As we report today, September inflation reached 3.5%.
Receipts are growing too, which is why the picture is not simply worse. Taxes were 6.9% higher than a year earlier over April to September, and Corporation Tax, income-related taxes and National Insurance together were £11.5bn above the OBR’s forecast. Spending as a whole was £8.9bn above, of which debt interest was £3.8bn and net social benefits £2.5bn.1
The test Healey must pass is his rule that day-to-day spending be covered by tax by 2029–30. The margin by which he meets it, known as headroom, was £23.6bn at the OBR’s March forecast.5 Nineteen economists polled by Reuters on 15 October put it now at a median of £10bn to £12bn and said he should rebuild it to £15bn to £16bn to keep bond investors onside.5 The Resolution Foundation says higher debt interest alone could add around £14bn a year to borrowing in 2029–30 and has headroom as little as £12bn; it wants at least £20bn.3
Who bears the gap depends on the Budget. Economists polled by Reuters expect modest cost-of-living help, paid for by rises in some smaller taxes.5 The Institute for Fiscal Studies says the bigger squeeze falls on departments: inflation erodes their cash budgets, which could force real-terms cuts or top-ups of tens of billions of pounds.7 And borrowers feel it twice, since debt interest also tracks the Bank of England’s decision on 5 November.
How the OBR will treat inflation’s effect on tax receipts, which is where the £8bn gap between the IFS and Resolution Foundation estimates comes from. The Budget forecasts are not out until 28 October.
Healey delivers the Budget on 28 October, the same day the OBR publishes its updated economic and fiscal outlook.1 The Bank of England announces its rate decision on 5 November. The ONS publishes October’s public finances on 20 November, the first look at borrowing after the Budget.1