Britain’s borrowing is back at pandemic levels – but there are reasons to be cheerful

The biggest gap between government spending and tax revenues in five years will come as another blow to the chancellor – but next month’s Budget is an opportunity for her to win back bond market confidence and, in turn, to lower borrowing costs

“Eco-god – why hast thou forsaken me?” Chancellor Rachel Reeves could be forgiven for despairing at the torrent of grim economic data emerging in recent weeks. Today’s borrowing figures are only the latest blow.

Last month, the gap between what the government spent and what it raised in tax hit £20.2bn – the worst September performance in five years, and £1.6bn (8.6 per cent) higher than a year ago. Borrowing levels were last this high five years ago, in the middle of the pandemic, when half the nation was sitting at home on furlough, their wages subsidised by the government.

According to the latest figures, HM Revenue & Customs did its bit, collecting £7.3bn more from taxpayers. The problem is that the government spent £8.9bn more on public services and debt interest. Total borrowing now stands at 95.3 per cent of GDP, a level last seen in the early 1960s, when Britain was still paying off the Second World War. Some estimates even put the figure higher.

Chancellor Rachel Reeves has received a lot of grim economic data in recent weeks (PA Wire)

Of course, monthly borrowing data can be notoriously volatile – hostage to countless variables that are impossible to predict. Economic forecasters struggle to get even the easy numbers right, let alone those offered by a random number generator (assuming you fed them the right parameters).

Still, bad news on borrowing has become a running theme. What will worry Rachel Reeves most is the current budget deficit – borrowing to fund day-to-day spending such as schools, hospitals, pensions and benefits – which came to £13.4bn. That breaches her own much-vaunted fiscal rules, which allow borrowing for investment but not for routine costs. Borrowing to build for the future can be justified; borrowing to keep the lights on cannot.

There are, at least, crumbs of comfort. September’s borrowing was slightly below the City’s forecast of £20.8bn, and close to the Office for Budget Responsibility’s estimate of £20.1bn. The OBR’s view matters more than the City’s, since it effectively “marks Reeves’ homework”, and the markets watch its judgments closely.

In global terms, Britain’s finances could look far worse. France’s debt-to-GDP ratio is around 113 per cent, and the politically fragile government there has had to shelve key reforms – including raising the retirement age from 62 to 64. (Here it’s already 66, and heading to 67. Welcome to the land of work-until-you-drop.)

America, meanwhile, is even deeper in the red, with borrowing around 125 per cent of GDP, and both its and France’s debt burdens are expected to rise further. By contrast, Britain’s is forecast to fall – at least if Reeves sticks to the “non-negotiable” fiscal rules she has set herself.

But her task is hardly made easier by interest rates sitting at 4 per cent – twice the level in the eurozone, of which France is a member. Persistent inflation is likely to keep rates high. One of the Bank of England’s rate-setters, Swati Dhingra, has urged her colleagues not to be “overly cautious”, blaming “short-term factors” for stubborn inflation. Yet Dhingra is the MPC’s leading dove, and the Bank’s chief economist, Huw Pill, has reaffirmed his preference for caution.

That means the chancellor faces an unenviable choice: a tax-raising Budget to repair the public finances, or further fiscal drift and higher borrowing costs. It’s an unpalatable prospect for those of us who will be soaked in the process. Still, if Reeves can rebuild a little headroom without stalling the economy, she might win back the bond markets’ confidence – and with it, the reward of lower borrowing costs.

Other developed nations may be taking a more cavalier approach to their own debt challenges, but if Reeves manages to keep Britain on a tighter path, the eventual pay-off could be worth it.

So, yes – better times may yet be on the way. But there will be pain first, and it may be some time before any of us find much in the way of relief.