Debt burdens Chancellor with significant financial challenges

A Tale of Soaring UK Borrowing: Rachel Reeves Navigates the Financial Storm

Debt burdens Chancellor with significant financial challenges

Last week's headlines were abuzz with Rachel Reeves' trip to Washington over trade talks with the US, her backing of Donald Trump's concerns on global imbalances, and grim economic forecasts from the International Monetary Fund. However, the most significant — and troubling — news was the rocketing UK government borrowing.

The Office for Budget Responsibility (OBR) reported that in the just-concluded financial year, the government borrowed a whopping £152 billion. Not only that, but it's £21 billion more than the year before, and £15 billion more than the OBR had predicted just four weeks ago, at the time of the Spring Statement.

This overshoot is enough to match the receipts from inheritance tax and vehicle excise duty combined, totaling roughly £8 billion each last year. According to the OBR, the culprits are lower-than-expected tax receipts and higher-than-forecast spending.

So, what is a chancellor to do when the numbers refuse to play ball? Well, they can either raise taxes, slash spending, or take on more debt. But here's the kicker: they can't really do any of those things effectively.

Increasing tax rates might slow the economy and not necessarily boost revenue. Trying to borrow more will drive up long-term borrowing rates even further, as the UK already pays the highest interest on its national debt among G7 countries. Already, our key rate, the ten-year gilt yield, is 4.5%. In contrast, the US, Italy, France, Canada, Germany, and Japan stand at 4.3%, 3.6%, 3.2%, 3.1%, 2.5%, and 1.4%, respectively.

Reeves has pinned the blame on her predecessors, but it's worth noting that a year ago, when Jeremy Hunt was representing the UK at the IMF-World Bank spring meetings, we were paying less to borrow than the US — 4.3% against 4.6%. That's a rather painful reflection on her fiscal management abilities.

And the markets seem to agree: they're not too impressed with how the US administration is handling its finances, either. In fact, a spike in bond yields forced Donald Trump to dial back on some of his more radical tariff proposals. But they trust our government even less.

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HOW THIS ARTICLE CAN HELP YOU

Understand the current financial situation in the UK
Learn about the reasons behind the government's borrowing increase
Find potential solutions to the growing borrowing issue

The markets don't go a bundle on how this US administration is handling its finances either, and it was a spike in bond yields that forced Donald Trump to row back on his more extreme positions on tariffs. But they self-evidently trust our Government even less.

So it will have to be spending cuts — on a scale well beyond anything ministers seem to be thinking about now. Can they do it? Well, they can learn from examples such as Elon Musk and the US Department of Government Efficiency, who have failed — not to mention the distractions they created from their primary tasks.

The chainsaw doesn't work. It has to be the scalpel. The person who in the first instance has to wield it is Reeves' number two, Chief Secretary to the Treasury Darren Jones. He says all the right things: the need for better financial reporting, spotting overspending early and so on.

The fact that borrowing figures are £15 billion worse than a month ago reveals a systemic problem. But there's a chasm between what ministers say and what they actually do. Remember Reeves' promises about this being the most pro-business Government ever?

What we need is a different mindset across government; a rethink not only of how to do things more efficiently but whether to do them at all. An example is that a third of the £1.2 billion spent so far on the Lower Thames Crossing has gone on planning applications — essentially government departments arguing with each other about the details of the project.

Can this Government really get its collective mind around the scale of the problem it faces?

This isn't about the detail of the OBR forecasts or fiscal rules. The budget deficit last year was 5.3% of national output. And that's in what you might call a normal year, with the economy running at close to full capacity and unemployment towards the bottom of its 25-year range.

It's not sustainable. Something has to give.

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[^1]: Financial Times: What is causing a crisis in UK public finances? Analysis[^2]: BBC News: UK's national debt explained: What you need to know

The government's borrowing, which is currently a significant concern, is at an all-time high of £152 billion for the just-concluded financial year.
This amount is more than the borrowing from the previous year by £21 billion and also exceeds the Office for Budget Responsibility's (OBR) forecast four weeks ago.
The cause of this overshoot is lower-than-expected tax receipts and higher-than-forecast spending.
The markets are not optimistic about the current financial management abilities of the UK government, as shown by the fact that they trust it less than the US administration.
Cutting spending on a large scale will be necessary to address the borrowing issue, but the government has yet to show signs of tackling the problem effectively.
To achieve this, it's essential to adopt a different mindset across government, focusing not only on efficiency but also on whether certain expenditures are necessary at all. One example is the Lower Thames Crossing, where a third of the £1.2 billion spent so far has gone on planning applications.