Government borrowing has soared – what now, Rachel Reeves?

The government’s spending watchdog is expected to slash its growth forecasts, leaving the chancellor with scant options if she is to make her numbers add up, warns James Moore

For Rachel Reeves and Labour, it doesn't just rain. It pours and pours and pours.

The latest torrent came courtesy of February’s borrowing figures which, at £10.7bn, are the fourth highest since records began, £0.1bn higher than the corresponding month in 2024 and more than £4bn higher than the Reuters poll of economists had expected (£6.6bn).

These monthly figures are always highly volatile and forecasting them is a mug’s game. One also has to wonder just how reliable the information from the Office for National Statistics (ONS) is these days (we’ll get to that).

But none of this changes the fact that the numbers look worse than the Welsh rugby team’s dismal wooden spoon winning Six Nations campaign. And no, I’m not exaggerating.

The raincloud tipping buckets onto No 11 is so dark and angry that it is probably visible from Cardiff. It is genuinely hard to imagine a worse result ahead of the next week’s spring statement, which is looking more and more like it will turn into an emergency Budget. Is it just me or does last year’s general election look like a good one to have lost?

Reeves’s problems go beyond the fact that she’s borrowing far more than she or anyone else wanted to keep the government machine running. The fiscal rules she is operating under – chancellors set these themselves but the markets and Britain’s lenders take them very seriously and are inclined to revolt if they’re broken – face a second threat from the Office for Budgetary Responsibility (OBR). The government spending watchdog is expected to cut its growth forecast in half.

This should not come as a surprise. The Bank of England has already done the same. However, the opinion of the OBR matters more because it marks Reeves’s homework, and her likely compliance with her fiscal rules, based on the government’s tax and spending plans. Lower growth means lower tax revenues means more problems.

This could get ugly. Labour is already embroiled in a bitter controversy over its plans to make disabled people foot the bill for its fiscal failures in the form of greatly reduced support. The way this was handled – whipping up a media storm and then spinning furiously about how it is really all about helping disabled people into work while talking piously about moral duties – makes it hard to feel any sympathy for the government.

The chancellor faces a horrible dilemma. The options available to her are either to impose more draconian spending cuts, despite having repeatedly promised no return to austerity, or to increases taxes despite having repeatedly promised not to hit “working people” in the pocket.

In reality, the latter promise has already been broken. with the decision to increasing employers’ national insurance contributions (NICs) to help fill a £20bn hole in the public finances. A tax on jobs – which is what the NICs hike does – is a stealth tax on working people. It will hit them when employers start cutting jobs and/or increasing their prices to cover the increased cost. The result of the latter will be more inflation and higher interest rates. The eco-rain is positively torrential.

True, we’ve had a modest pick up in consumer confidence. GfK’s long-running Consumer Confidence Index for March came in at -19. I know, that doesn’t look very good. But it is a three-month high. Wages have been running ahead of inflation for some time now, so there is scope for further improvement.

But what if Reeves opts to hike taxes? This might be her only option if she wants to keep the OBR and the markets off her back. But she can’t target business again, partly because Keir Starmer promised she wouldn’t and partly because the negative impact on growth of the NICs rise tells us she would be cutting off her nose to spite her face if she did.

I’ve said it before but it bears repeating: the chancellor’s lot is not a happy one. One of Labour’s many competing promises might just have to be broken. Unless, that is, Reeves decides to take on the markets by either busting her rules? I would suggest talking to Liz Truss about the potential impact of doing that. You don’t want your tenure to be haunted by another rotting lettuce.

Ps: I mentioned those numbers. The ONS has outraged the Institute for Fiscal Studies (IFS) by changing the way it calculates household wealth. The upshot is that we are allegedly a collective £2.3 trillion poorer than was previously thought. Yes, that’s a trillion and not a billion. We are talking trillions, here.

The IFS is sceptical over whether the new number is any more accurate than the old one. But given the longstanding concerns over some of the agency’s other numbers – particularly its labour force survey – it raises questions over whether we can trust anything it puts out.

This is where I do have some sympathy for the chancellor. How on earth can you hope to make policy when the data in front of you is about as reliable as the dodgy glue used on Tesla’s recalled Cybertrucks?