Introduction: UK borrowing hits £3.1bn in July
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The health, or unsoundness, of Britain’s public finances is a key issue for Westminster and the City of London, with a painful autumn budget looming.
And the latest public finances data, just released, shows that the UK borrowed more than twice as much as economists expected last month to balance the books.
Public borrowing hit £3.1bn in July, which is £1.8bn more than in July 2023. It’s the highest July borrowing since 2021 (when the Covid-19 pandemic drove up spending and hit tax revenues).
City economists had expected lower borrowing, of £1.5bn.
Crucially, the fiscal watchdog, the Office for Budget Responsibility, had estimated the UK would only need to borrow £100m in July – which is typically a strong month for tax receipts, such as income tax self-assessment returns.
So, the black hole in the public finances which chancellor Rachel Reeves warned of in July has just got deeper.
Although the tax take increased in July, this was more than wiped out by higher government spending.
ONS deputy director for public sector finances, Jessica Barnaby, explains:
“July borrowing was almost £2 billion higher this year than in 2023. Revenue was up on last year, with income tax receipts in particular growing strongly. However, this was more than offset by a rise in central government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.”
The ONS has also revised some of its earlier public finances data, which has reduced its estimate of borrowing since April by £1.5bn,. It now estimates the UK has borrowed £51.4bn so far this financial year.
That’s £500m less than was borrowed in the same four months last year, but £4.7bn more than the £46.6 billion forecast by the OBR for this period.
This increase in borrowing intensifies the pressure on Rachel Reeves to make tough decisions in her first fiscal event, this autumn.
As the Guardian reported last night, the chancellor is planning to raise taxes, cut spending and get tough on benefits in October’s budget as she tries to fill a substantial black hole in the public finances – despite stronger than expected growth in the first half of 2024.
Reaction to follow….
The agenda
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7am BST: UK public finances for July
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9am BST: South Africa’s inflation report for July
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Noon BST: US weekly mortgagea approvals data
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3.30pm: EIA to release US crude oil inventory data
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7pm: Minutes of July’s Federal Reserve interest-rate setting meeting released
Key events
Investec: Expect tax rises in the budget
Today’s public sector numbers confirm that fiscal progress remains disappointing so far this year and strengthen the view that the government will be forced into some tax rises at the 30 October Budget.
So says Philip Shaw, economist at City firm Investec.
He told clients this morning:
We are currently only a third of the way through the financial year and it is early to be drawing concrete conclusions about the medium-term path of the public finances. However as things stand, the relatively poor trend in borrowing indicates that the fiscal headroom from the previous government’s fiscal mandate (£8.9bn) could be completely eliminated.
This is especially the case when one bears in mind the relatively generous public sector pay settlements sanctioned by the current government and that as things stand, non-protected government departments would be faced with a decline in their budgets in real terms over the medium-term. It is possible that Chancellor Rachel Reeves loosens the rules a little, but this would risk undermining her fiscal credibility.
Inheritance tax take is rising
Inheritance tax has brought in an extra £200m so far this year, new figures from HMRC show.
Inheritance Tax receipts for April to July 2024 were £2.8bn, up from £2.6bn in the same period last year.
HMRC says the increase is due to increased asset values pushing up the value of estates, and the previous government’s decision to freeze IHT thresholds.
Rachael Griffin, tax and financial planning expert at Quilter, says the increase will “rekindle debates” about whether this tax will be increased as the government attempts to shore up the public finances.
Griffin explains:
Speculation is rife that the Chancellor might introduce changes to IHT, particularly targeting Agricultural Property Relief (APR) and Business Property Relief (BPR).
These reliefs, which currently allow farms and family businesses to be passed down without incurring prohibitive tax liabilities, might be scaled back. Labour might opt to remove APR for those who do not actually own farmland and BPR where it doesn’t meet the intention of the relief i.e. protecting small businesses being kept ‘in the family’.
However, the unintended consequences could be huge especially for the AIM market which relies heavily on the shares being eligible for BPR after holding the shares for two years. This might therefore hamper Labour’s stated aim of getting more investment into UK plc.
National debt now 99.4% of GDP
The big picture remains that the UK’s national debt is the highest since the early 1960s, as a share of the economy.
Public sector net debt excluding public sector banks is now estimated to be 99.4% of gross domestic product (GDP), at around £2.74 trillion.
That’s an increase of 3.8 percentage points since July 2023.
Rob Wood, chief UK economist at Pantheon Macroeconomics, says:
“We expect … Reeves to borrow around 20 billion pounds per year more than planned in the March Budget for the next five years as well as funding medium-term spending with higher taxes.”
IFS: Reeves faces ‘tough choices’ in the budget
Today’s public finances show that the UK’s decent-looking growth rate this year does not mean that everything is rosy in the economy.
Isabel Stockton, senior research economist at the Institute for Fiscal Studies, explains:
Tax revenues – despite economic growth in the first quarter of the financial year surpassing some of the more pessimistic expectations – are running close to forecast or, if anything, slightly behind. This, combined with higher spending, leaves borrowing higher than forecast.
Stockton adds:
All of these data are preliminary and we should be cautious of over-interpreting them. But the early signs are that better-than-expected growth figures won’t be enough save Rachel Reeves from tough choices in her first Budget on 30 October.
The combination of in-year spending pressures identified at last month’s spending audit and the ongoing, and well known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise.”
Capital Economics predicts Reeves will raise taxes and increase borrowing
July’s public finances figures continued the recent run of bad news on the fiscal position, says Alex Kerr, UK economist at Capital Economics.
Kerr reckons that public borrowing is track to overshoot the OBR’s 2024/25 forecast of £87.2bn by £4.7bn.
Even if this overshoot does not persist, Capital Economics expect the Chancellor to raise taxes and increase borrowing at the Budget on 30th October.
Kerr explains:
Overall, today’s release highlights the tight fiscal backdrop that the Chancellor faces ahead of her first Budget on 30th October. We still think that she will look to raise an additional £10bn a year via higher taxes in the Budget and increase borrowing by around £7bn a year.
The increase in borrowing in July leaves Rachel Reeves with “little headroom” ahead of October’s budget, warns Dennis Tatarkov, senior economist at KPMG UK.
“Borrowing in July was ahead of OBR forecasts and could rise further if the announced overspend makes its way into the revised figures. This could take borrowing for the 2023-24 fiscal year to over £90bn if significant savings cannot be found.
“Strong GDP growth in the first half of the year has helped bring higher than expected revenues, which in July were £99.4bn and ahead of projections made during the March Budget. However, an expected slowing in GDP growth ahead could limit revenues in the second half of the year.
“We estimate the headroom that the Chancellor has to meet current fiscal rules has shrunk further, down to £6bn from £9bn in March. This may mean that the targets themselves could see a tweak in the upcoming Autumn Budget.”
UK spent £7bn on debt interest in July
Britain spent £7bn paying interest on the national debt in July.
That’s the second highest interest payable in any July since records began in 1997, the ONS says.
That’s lower than the £8bn interest bill in July 2023, though, as falling inflation lowered the debt bill on index-linked bonds.
Government expenditure jumped by £3.5bn year-on-year in July – more than cancelling out the increase in tax – to £107.4bn.
This was primarily due to a £2.7bn increase in benefits, linked to inflation.
There was also a £1.3bn rise in central government departmental spending, as inflation and pay rises increased running costs.
National insurance cut hits tax take
Digging into July’s public finances, we can see that higher tax receipts lifted central government’s income to £91.0bn in July – £1.7bn more than in July 2023.
Tax receipts increased by £2.1bn to £71.2bn, including a £1.7bn increase in income tax receipts, £300m more in corporation tax, and £200m of VAT.
But, there was a £1.1bn drop in “compulsory social contributions”, to £13.8bn, due to the reductions in the main rates of National Insurance made by former chancellor Jeremy Hunt.
Self-assessment tax receipts rose by £1.1bn year-on-year to £12.9bn. However, that’s £700m less than the OBR had forecast (one reason the deficit was much higher than the £100m expected by the fiscal watchdog).
Darren Jones: We’ve been left with a dire inheritance
The jump in UK government borrowing last month shows the “dire inheritance” left by the previous government, says chief Secretary to the Treasury Darren Jones:
“Today’s figures are yet more proof of the dire inheritance left to us by the previous government.
“A £22 billion black hole in the public finances this year, a decade of economic stagnation and public debt at its highest level since the 1960s, with taxpayers’ money being wasted on debt interest payments rather than on our public services.
“We are taking the tough decisions that are needed to fix the foundations of our economy, modernise our public services and rebuild Britain so we can put more money back into people’s pockets across the country.”
Introduction: UK borrowing hits £3.1bn in July
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The health, or unsoundness, of Britain’s public finances is a key issue for Westminster and the City of London, with a painful autumn budget looming.
And the latest public finances data, just released, shows that the UK borrowed more than twice as much as economists expected last month to balance the books.
Public borrowing hit £3.1bn in July, which is £1.8bn more than in July 2023. It’s the highest July borrowing since 2021 (when the Covid-19 pandemic drove up spending and hit tax revenues).
City economists had expected lower borrowing, of £1.5bn.
Crucially, the fiscal watchdog, the Office for Budget Responsibility, had estimated the UK would only need to borrow £100m in July – which is typically a strong month for tax receipts, such as income tax self-assessment returns.
So, the black hole in the public finances which chancellor Rachel Reeves warned of in July has just got deeper.
Although the tax take increased in July, this was more than wiped out by higher government spending.
ONS deputy director for public sector finances, Jessica Barnaby, explains:
“July borrowing was almost £2 billion higher this year than in 2023. Revenue was up on last year, with income tax receipts in particular growing strongly. However, this was more than offset by a rise in central government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.”
The ONS has also revised some of its earlier public finances data, which has reduced its estimate of borrowing since April by £1.5bn,. It now estimates the UK has borrowed £51.4bn so far this financial year.
That’s £500m less than was borrowed in the same four months last year, but £4.7bn more than the £46.6 billion forecast by the OBR for this period.
This increase in borrowing intensifies the pressure on Rachel Reeves to make tough decisions in her first fiscal event, this autumn.
As the Guardian reported last night, the chancellor is planning to raise taxes, cut spending and get tough on benefits in October’s budget as she tries to fill a substantial black hole in the public finances – despite stronger than expected growth in the first half of 2024.
Reaction to follow….
The agenda
-
7am BST: UK public finances for July
-
9am BST: South Africa’s inflation report for July
-
Noon BST: US weekly mortgagea approvals data
-
3.30pm: EIA to release US crude oil inventory data
-
7pm: Minutes of July’s Federal Reserve interest-rate setting meeting released