The national debt rose sharply to over £20 billion in September – the highest level in five years – adding further pressure on Chancellor Rachel Reeves as she prepares a tax-rising budget next month.
According to the Office for National Statistics (ONS), monthly borrowing has increased by £1.6 billion since August, bringing the six-month total to £99.8 billion, the second highest ever recorded in the first half of a financial year. The current budget deficit is currently £71.8 billion.
The cost of servicing debt also rose sharply, with interest payments reaching £9.7 billion in September. The share of national debt in GDP rose by one percentage point to 95.3% compared to the previous year.
The figures come at a critical time for Labor as the chancellor seeks to meet strict budget rules that require everyday spending to be offset by revenue by 2030 – a target that economists warn could now mean tax rises of at least £25 billion to £30 billion.
Richard Carter, head of fixed interest research at Quilter Cheviot, said the UK economy was now “in something of a straitjacket”.
“Fiscal space is almost non-existent and growth is hampered by a high tax burden and uncertainty about further revenue raising measures,” he said. The recent decline in Treasury yields has provided some breathing room, but markets will be keeping a close eye on Reeves, he added.
Treasury chief secretary James Murray said the government remained committed to fiscal discipline: “This government will never play fast and loose with public finances. We plan to reduce borrowing and deliver the largest deficit reduction in the G7 over the next five years.”
However, opposition figures accused Reeves of having already lost control of the country’s finances. Conservative shadow chancellor Mel Stride said: “If Rachel Reeves had a plan – or a backbone – she would get spending under control rather than planning yet more tax rises.”
Economists believe Reeves’ £9.9bn headroom in the spring statement was largely wiped out by: higher-than-expected borrowing costs, revisions to welfare reform savings and an expected OBR productivity downgrade
John Wyn-Evans, head of market analysis at Rathbones, warned that taxes would have to rise by “£25 billion or more” unless Labor opted for politically difficult spending cuts.
To mitigate the impact of expected tax increases, the Finance Ministry is announcing growth-enhancing reforms, including:
• A deregulation drive aimed at delivering £6 billion in corporate administration savings
• Planning system overhauls
• Regional investment incentives
Some analysts warn that the labor law – which has not yet been costed by the OBR – could increase regulatory burdens and weaken business confidence.
Reeves has instructed ministers to prioritize reducing inflation, which is expected to reach 4% in September. Lower inflation could pave the way for earlier interest rate cuts, reducing government borrowing costs and calming bond markets.
According to the OBR, the government is expected to spend over $110 billion in 2025.
