The UK government borrowed more than expected in June amid speculation the chancellor, Rachel Reeves, will need to raise taxes at the autumn budget to repair the public finances.
Figures from the Office for National Statistics (ONS) showed public sector net borrowing rose to £20.7bn, up by £6.6bn from the same month a year earlier to reach the second-highest June borrowing figure since monthly records began in 1993.
City economists had forecast borrowing – the difference between public spending and income – to increase to £16.5bn.
Reeves defended her fiscal rules on Tuesday, signalling she will take action in the autumn budget rather than risk breaking them and refusing to rule out wealth taxes.
“It is the fiscal rules that provide the stability that underpins a successful, thriving, prosperous economy and gives government bondholders the confidence to carry on buying those government bonds and we are still very reliant on the goodwill of strangers in buying our government bonds,” she said, giving evidence to the cross-party House of Lords economic affairs committee.
“One in 10 pounds the government is spending is spent servicing government debt.
“I’m a Labour politician. I don’t think there’s anything progressive about spending £100bn a year, often to US hedge funds, when I would rather spend that money on the health service or on our defence or on better schools for our children.”
In June’s public finance data, the ONS said the escalating cost of providing public services and a large increase in servicing the government’s outstanding debts outstripped rising income from taxes and national insurance contributions.
Interest charges on central government debt rose by £8.4bn to £16.4bn from a year earlier, the second-highest June level on records back to 1997, driven by higher index-linked gilt costs after a rise in the retail prices index measure of inflation.
It comes as Reeves prepares for a tough autumn budget amid mounting speculation over the need for large tax rises to cover a multibillion-pound shortfall in the public finances after the government’s high-stakes welfare U-turn earlier this month.
Reeves acknowledged the U-turn had come at a price. “The OBR will do their costings in the autumn and set that out, probably to the tune of £5bn,” she said.
UK borrowing chart
Ministers have warned of “financial consequences” after the backtracking on disability benefits and winter fuel payments for pensioners.
Alongside a sluggish economic outlook and possible downgrade in productivity forecasts from the Office for Budget Responsibility (OBR) at the autumn budget, economists have said Reeves could face a £30bn shortfall against her fiscal rules.
The UK economy shrank for two consecutive months in April and May, while unemployment and inflation have risen, as businesses and households come under pressure from tax rises, elevated borrowing costs, and global uncertainty amid Donald Trump’s trade war.
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Despite the June overshoot in borrowing, the sum borrowed over the first three months of the financial year was close to the level predicted by the OBR at the March spring statement. However, economists warned tax rises were increasingly likely amid rising borrowing levels.
“We expect ‘sin tax’ and duty hikes, freezing income tax thresholds for an extra year in 2029 and a pensions tax raid – reinstating the lifetime limit on pension pots and cutting relief – to fill most of the hole,” said Rob Wood, the chief UK economist at the consultancy Pantheon Macroeconomics.
“The fiscal pain will, however, continue beyond the autumn. Defence spending will almost certainly have to rise faster than the government currently planned, for instance, necessitating further tax hikes or rule tweaks.”
Reeves has faced growing demands from Labour backbenchers, unions and the former party leader Neil Kinnock to consider introducing a wealth tax. However, the chancellor has so far sought to keep her options open while pushing to reassure business leaders that her priority remains driving up economic growth.
Challenged by the former Tory chancellor Norman Lamont on Tuesday to rule out a wealth tax, Reeves said: “this is with respect what you would have done, and did do, in my position: you rightly said that tax is a matter for a budget and we’ll set out our policy then”.
The Institute for Fiscal Studies said on Monday there was a “strong case” for the chancellor to tweak her self-imposed rule, which requires day-to-day spending to be matched by receipts by the fifth year of official forecasts.
Mel Stride, the shadow chancellor, said Labour was spending money it did not have. “Labour’s jobs tax and reckless borrowing is killing growth and fuelling inflation – paving the way for more tax hikes and more borrowing in the autumn. Make no mistake – working families will pay the price for Labour’s failure and costly U-turns.”
According to the latest snapshot, public sector net debt, the sum of every annual borrowing figure, was estimated at 96.3% of GDP, one of its highest levels since the 1960s.
The OBR warned earlier this month that the UK’s public finances were on an unsustainable long-term trajectory, driven by rising debt levels, the growing cost of state pensions and the mounting climate emergency.
