The UK is at a financial crossroads as public borrowing surged to £16.6 billion for September, marking the third-highest level for this month since records began. This unexpected rise of £2.1 billion compared to last September poses significant challenges for the new Labour government just days before its first budget, scheduled for October 30, 2024.
Official data from the Office for National Statistics (ONS) revealed the sobering truth: not only does this borrowing figure surpass the Office for Budget Responsibility's (OBR) estimate by £1.5 billion, but it also highlights the increasing pressure on the government to manage its debt responsibly. The level of net debt now stands at 98.5% of the nation’s GDP, reflecting the kind of burden not seen since the 1960s.
While there were some minor positive signs, like a decrease in net social benefits by £2 billion partly due to lower winter fuel payments, the overarching narrative remains grim. Chancellor Rachel Reeves has promised strict fiscal discipline, asserting, "If we cannot afford it, we cannot do it," effectively ruling out unaffordable expenditures.
Economists and analysts are bracing for tough measures, including potential tax increases and spending cuts, as they firmly believe resolving the reported £22 billion 'black hole' left by the previous Conservative government will require significant sacrifices. Treasury Chief Secretary Darren Jones poignantly noted, "We have inherited a £22 billion black hole... Resolving this black hole at the Budget next week will require tough choices."
The challenges seem twofold. Labour's budget will have to address the rising spending due to increased operating costs, including heightened public sector pay as the government seeks to afford wages to junior doctors who recently ended their strike action. Meanwhile, the public mood is rife with wariness as more tax hikes loom, prompting calls for transparency and detailed disclosures from the Chancellor to stave off market panic.
Market experts like Lindsay James from Quilter Investors have voiced concerns about the relationship between government spending and interest rates, noting the recent climb of the UK 10-year gilt yields from 3.75% to 4.21% by October. Analysts suggest this increase signals heightened costs for government borrowing, effectively creating what senior technical analyst Axel Rudolph described as "a perfect storm for borrowing costs."
Expectations surrounding the upcoming budget are rife with uncertainty. The Labour government has been under considerable scrutiny owing to its claims of the financial void it inherited. Critics are asking how the government plans to fill this gap without harming public services or exacerbation of existing economic woes.
Yet, some perspectives highlight necessary reassurances for the economy. For the first time since January 2021, UK inflation fell to below the Bank of England's target of 2%. The economy reported growth for August, hinting at potential stability. Analysts speculate this might influence the central bank’s monetary policy, with the potential for another measured interest rate cut to stimulate consumer spending.
Overall, it remains to be seen how the government can achieve harmony between necessary fiscal responsibility and stimulating growth. Observers are particularly wary of any knee-jerk reactions from markets, especially against the backdrop of the recent £22 billion black hole claim.
