Higher-than-expected public sector borrowing in the first four months of the 2024-25 financial year underscores the parlous state of departmental finances ahead of the October Budget, the Institute for Fiscal Studies has warned.
Figures from the Office for National Statistics published yesterday gave a provisional estimate for public sector borrowing of £51.4bn for the April-to-July period this year. While the figure is £500m less than borrowing for the same period last year, it is £4.7bn more than the figure predicted by the Office for Budget Responsibility.
According to the ONS, central government actually borrowed £79.2bn over the period, but the figure was offset by a Bank of England surplus and lower-than-expected borrowing in some other parts of the public sector.
It said central government’s total spending between April and July was £405.2bn, some £8.7bn more than in the same period last year. Spending on goods and services increased by £6.2bn as inflation increased running costs. The ONS includes pay rises in that figure.
The OBR acknowledged that the difference between its forecast profile and yesterday's figures was "driven primarily by higher-than-forecast consumption spending by government departments", which it said "appears related to strong growth in public sector pay".
The watchdog said that although the figures were "highly provisional", they nevertheless "indicate that departmental spending for 2024-25 could significantly exceed the March 2024 forecast for departmental spending".
IFS senior research economist Isabel Stockton said the "early signs" were that recent better-than-expected economic growth figures would not help new chancellor Rachel Reeves avoid "tough choices" in the Budget, which is due on 30 October.
"In just four months – or one-third of this financial year – the government appears to have spent 34.1% of what was budgeted for the whole year," she said.
"Since comparable data began in 1997 it has never spent more than 32.9% of the eventual total in the first third of the financial year. This is indicative of the scale of the pressures on departmental budgets – in some cases well above what was budgeted for."
Last month Reeves attracted criticism for claiming to have found a £22bn "black hole" in the nation's finances following a general-election campaign in which both the Conservative Party and Labour were repeatedly accused of playing down the state of the national coffers.
The IFS's Stockton said the latest data, coupled with the Treasury audit underpinning Reeves' "black hole" announcement, heralded a new era of belt-tightening for departments.
"The combination of in-year spending pressures identified at last month's spending audit and the ongoing, and well-known, pressures facing many public services suggest that the accompanying Spending Review for 2025-26 could be a particularly difficult exercise," she said.
Cara Pacitti, senior economist at the Resolution Foundation, said the deteriorating state of the public finances would ramp up pressure on a new administration keen to deliver on its manifesto commitments.
"The fiscal inheritance facing the chancellor is one of rising taxes, increasing spending challenges, and very little wriggle room in the event of bad economic news," she said. "This combines to create a challenging backdrop for the new government to realise its ambitions of boosting growth while putting the public finances on a sustainable path."
Chief secretary to the Treasury Darren Jones said the ONS figures were "yet more proof of the dire inheritance" left to the new government by the previous administration.
He said that inheritance included "a £22bn black hole in the public finances this year; a decade of economic stagnation; and public debt at its highest level since the 1960s, with taxpayers’ money being wasted on debt interest payments rather than on our public services."
Jones added: "We are taking the tough decisions that are needed to fix the foundations of our economy, modernise our public services and rebuild Britain so we can put more money back into people’s pockets across the country."
The Treasury said debt interest costs amounted to £102.2bn in 2023-24. It said that if debt interest payments were a government department, its budget would only be exceeded by that of the Department of Health and Social Care.
The ONS is currently reviewing the preparation of its March forecast for departmental spending. The review is due to be completed ahead of the Budget.