UK public sector borrowing starts the new fiscal year on a slightly brighter note

Borrowing in the new fiscal year is so far running lower than forecast. But unrealistic spending plans going forward mean the next government faces a fiscal 'pandora's box' of tax rises and/or borrowing more if already creaking public services are not to be cut back further.

By Stuart Cole | @Stuart Cole | 21 June 2024


Today’s UK borrowing figures provide a welcome – if only small – boost for the next government, as they showed spending to be running below expected levels. Borrowing in May totaled £15bn, an increase on the £14.8bn figure seen in May 2023 but slightly less than the £15.7bn figure forecast by the Office for Budget Responsibility (OBR). With April’s borrowing figure also revised down, spending in the first two months of the new fiscal year is now running £1.5bn below forecasts.

The uptick in May’s borrowing figure was largely the result of the 2% cut made to national insurance contributions that took effect in April, reducing receipts from this tax by £900mn compared to May 2023, while the improvement in April and May overall was largely attributable to lower investment than forecast by the OBR, which more than offset slightly lower income tax receipts. The cost of servicing the UK’s large debt stock also fell, while the absence this year of the energy support-payments seen last year also had a positive impact. However, the sizeable increases made to social security benefits in April meant welfare payments rose significantly.

But while the £1.5bn spending undershoot in itself is a large sum of money, in terms of the size of the UK’s fiscal deficit it is insignificant and will make little difference to the fiscal position the next chancellor will inherit. The spending plans already set out by current UK Chancellor Hunt are widely seen as unrealistic as they require reducing public spending to a level that is seen as politically unacceptable. An annual increase in real public spending of 1.0% for the next five years is currently penciled in. However, with the budgets for health, defence and education ‘ring fenced’, this means spending in other departments will be required to fall by around 2.3% if the limit on total spending is not to be breached. Accordingly, whichever party wins the forthcoming election, spending will need to be increased if the government is to avoid a public backlash over the cuts to services the budgets for these unprotected departments imply. And this is before the additional costs of the large compensation sums expected to be paid to victims of the Post Office and infected blood scandals are taken into account, or of the military aid promises made to Ukraine. As such, an increase in taxes and/or borrowing over the course of the next Parliament looks unavoidable.

This difficult outlook is further complicated by the fact that the public sector borrowing figures are incredibly volatile and largely worthless in terms of the short-term picture they present. Although May’s borrowing figure was higher than expected, April’s figure was actually revised down from £20.5bn to £18.4bn. But the estimate of borrowing in the last financial year as a whole was revised up from £121.4bn to £122.1bn, a figure significantly higher than the OBR's forecast of £114.1bn. And it is almost certain that May’s figure will be subject to revisions next month too. Clearly the numbers need to be read with extreme caution and not taken at face value – revisions can easily change the fiscal outlook for the government on an almost monthly basis.

Overall, the picture being presented is that whatever party wins the forthcoming general election, the fiscal challenge it will face will be huge, with spending increases required if already creaking public services are not to be scaled back further. But this will be coming at a time when the share of national output confiscated by the government is already running at the highest level it has been at for over a generation and the ability to significantly increase borrowing is hamstrung by debt being at its highest level since the 1960s and close to 100% GDP. The next UK Chancellor may end up privately wishing their party had lost the general election.

The huge fiscal challenge facing the UK may leave the next chancellor privately wishing their party had lost the forthcoming general election.