UK borrowing for September hit £16.6bn, a £2.1bn increase from September 2023, putting public sector net debt at 98.5% of the nation’s GDP.
The figure outpaced the Office for Budget Responsibility’s (OBR) estimate by £1.5bn, and represented the third-highest September borrowing since 1993, according to the Office for National Statistics (ONS). However, it came in below some expected market forecasts, which sat at £17.5bn, according to interactive investor’s head of markets Richard Hunter.
Compared with September 2023, increases in cost came from interest payable on central government debt, central government spending on goods and services, and day-to-day costs for running local government.
Despite the overall rise, net social benefits decreased by £2bn for September this year with reduced spending on winter fuel payments. According to the ONS, the reduction was a combination of the changes in eligibility and the lack of a one-time payment which was part of last year’s figure.
The data comes as the UK prepares for the upcoming Autumn Budget on 30 October which has promised to tighten purse strings.
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Lindsay James, investment strategist at Quilter Investors, said UK finances are now at a “breaking point”.
“Although Rachel Reeves has promised that the UK will not see a return to austerity, a series of tax increases in one form or another are all but guaranteed at next week’s budget. The chancellor has warned the UK public that there is a very large fiscal ‘black hole’ to be filled and has repeatedly indicated that difficult decisions will be necessary. The Labour government will want to avoid a repeat of the negative reactions from financial markets in recent years to unfunded tax cuts and spending plans, so the chancellor will need to be transparent when announcing any changes and the anticipated costs,” James said.
“The mood has been bleak in the lead up to the budget, and while it remains to be seen how the market will react to any announcements, there are still some positives for the UK economy. For the first time in more than three years inflation is now well below the Bank of England’s 2% target. The economy finally grew in August following two months of stagnation, and while higher interest rates have begun to take a toll on the labour market, there are still signs of progress. With all that considered, the Bank of England is expected to continue on its ‘slow and steady’ path with the potential for another 0.25% cut at its next monetary policy meeting, which could help to lift consumer confidence and provide a much needed boost to the economy.”
Chancellor Rachel Reeves has been clear since the date was set in July that the Autumn Budget would be tight, stating “if we cannot afford it we cannot do it”, and referencing a £22bn ‘black hole’ left by the Conservative government.
Danni Hewson, AJ Bell’s head of financial analysis, said: “There’s been a lot of scrutiny over Labour’s claims of a £22bn ‘black hole’ but when you consider borrowing in the financial year to date has come in at £6.7bn more than OBR forecasts from the last Budget in March, you can understand why just scrabbling around at the back of the sofa for a bit of loose change really isn’t going to cut it if public services aren’t going to be allowed to decline from where they currently are.
“If this Budget is going to ‘fix the foundations’ as ministers have briefed, then a number of those tax increases that have made it into newspaper print over the last few weeks will have to make it into the chancellor’s final draft.
“How Rachel Reeves sells it to us is going to be crucial. She needs to bring businesses and the household consumer with her on this journey if growth is going to reach meaningful enough levels to balance the books, which at the moment are heavily weighted against her.”
See also: AJ Bell posts 22% AUA increase despite ‘unhelpful’ Budget uncertainty
As the Budget approaches, UK 10-year gilt yields have climbed from 3.75% in September to 4.21% in October.
Axel Rudolph, senior technical analyst at IG Group, said while some of the hike can be attributed to budget woes, a stubborn inflation rate for the UK has also added pressure, creating a “perfect storm” for borrowing costs.
“Some analysts anticipate that the government may need to sell more gilts in the financial year ending March 2025 than the current forecast of £278bn. This increased debt issuance could put further upward pressure on yields, potentially creating a vicious cycle of rising borrowing costs,” Rudolph said.
“The situation has led bondholders to warn that the chancellor will need to walk a “tightrope” if she intends to proceed with her borrowing and investment plans without triggering a gilt sell-off. This delicate balancing act will be crucial in maintaining investor confidence and economic stability.”
This story was written by our sister title, Portfolio Adviser
