The government has been warning of a “dire economic inheritance” since taking office, with a looming budget in the fall. In a document released earlier this summer, Rachel Reeves highlighted the dismal state of Britain’s economy and public finances, suggesting that significant measures, such as tax increases, would be necessary.
However, recent economic news tells a different story. Inflation remains low, leading the Bank of England to cut interest rates earlier this month. Additionally, the latest gross domestic product (GDP) estimates show that the UK is actually experiencing strong growth. In fact, the UK has surpassed other G7 nations in economic growth in the first half of 2024, after being the second-slowest growing economy in 2023.
This has led many to question whether the government’s claims may be exaggerated for political purposes. This morning, the latest public finance numbers were released and they paint a different picture. While the overall borrowing figures may seem stable, a closer look reveals key information.
Despite the faster-than-expected economic growth, tax revenues have not seen a significant increase. According to the Office for National Statistics, tax revenues are in line with the projections made by the Office for Budget Responsibility (OBR) in March. In fact, the government has collected slightly less than expected. However, government spending tells a different story. The OBR projected that the government would have spent £396 billion by now, but in reality, it has already spent £405 billion. This overspending has eaten into the £9 billion “headroom” that the government has before breaking its fiscal rules.
It is important to note that these figures only account for the first four months of the fiscal year. If this trend continues, the gap could widen even further. As a result, the chancellor has reportedly already decided on a course of action for the October budget: more taxes and spending cuts. Sources within Whitehall have indicated that the budget will be challenging.
However, there is another way for the chancellor to create more headroom within her fiscal rules. Many economists argue that the net debt statistic used by the government is not the most accurate measure, and that the total national debt, including debt owned by the Bank of England, should be used. If the chancellor chooses to use this alternative measure (which is currently under consideration), she will have more room to work with.
Despite this, it is unlikely that the chancellor will change her approach at the October budget. The public can expect more difficult news to come.
