THE Chancellor has been dealt another setback after borrowing hit the highest level in five years, making Budget tax rises “inevitable”.
The Government borrowed more money than expected last month, at £18billion, according to figures from the Office for National Statistics (ONS).
This was £3.5billion more than in August 2024.
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The interest on Government debt soared by £1.9billion to £8.4billion, which added to higher spending on benefits and public services.
This offset any boost from the National Insurance Contributions hike, the ONS said.
It marked the highest August borrowing since 2020, significantly overshooting the £12.8billion expected by economists.
The level of government borrowing was £5.5billion higher than the Office for Budget Responsibility forecast in March.
Meanwhile, borrowing for the first five months of the financial year hit £83.8billion.
This was £16.2billion higher than the same period last year and well ahead of the OBR’s £72.4billion prediction.
Martin Beck, chief economist at WPI Strategy, said: “The £10billion buffer the Chancellor pencilled in against her key fiscal rule in March has almost certainly gone.
“That means tax rises in November look inevitable.”
James Murray, Chief Secretary to the Treasury, insisted the Government “has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest”.
He added: “Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms and putting more money in working people’s pockets.”
The news comes after the Bank of England chose to hold interest rates at 4% yesterday.
It had been hoped that the central bank would cut rates and provide homeowners with relief from mounting mortgage costs.
But inflation remained unchanged at 3.8% in August, the highest level since the start of 2024.
With inflation still so sticky, the Bank chose to maintain the base rate at its current level to curb borrowing and spending.
The Bank has also decided to slow the pace at which it sells government bonds, known as gilts, yesterday to minimise disruption in the already turbulent financial markets.
Government bonds are essentially loans provided by investors to the government.
When you buy a bond, you’re lending your money to the government for a set period.
In return, the government pays you regular interest and repays the full loan amount at the end of the agreed term.
These bonds were initially bought by the Bank between 2009 and 2021 during periods of economic crisis – including the financial crash and the pandemic – through a process called quantitative easing (QE).
QE was aimed at supporting the economy by injecting liquidity into financial markets.
The Bank is now reversing this policy through quantitative tightening (QT), where it gradually sells off these bonds to reduce its balance sheet and manage inflation.
However, policymakers have decided to lower the annual target for bond sales from £100billion to £70billion to avoid destabilising the bond market while still working towards their economic objectives.
This decision comes after long-dated gilt yields reached their highest levels since 1998 earlier this month.
Gilt yields reflect the return investors demand for lending money to the government.
The yields tend to rise when bond prices fall.
If the Bank were to sell too many gilts too quickly, it could flood the market, drive bond prices down even further, and push yields higher.
Higher yields make government borrowing more expensive and can have other economic effects, including increasing mortgage rates and business loan costs.
Meanwhile, earlier this month Sterling tumbled sharply against the US Dollar.
Sterling slid 1% against the US Dollar to $1.33 and 0.7% against the Euro to €0.8698.
This was the worst performance among G10 currencies and highlighted growing unease among investors about the UK’s economic stability.
The news caused the yields to climb, making borrowing increasingly expensive for the government.
Which taxes is Reeves likely to hike?
The government is mulling several big changes to tax in a bid to boost the public coffers.
The Labour Party promised no tax rises for working Brits in its manifesto.
In a speech last June Sir Keir Starmer ruled out raising income tax, National Insurance or VAT in the next parliament.
This has left the party with fewer options for tax hikes to stump up much needed cash.
Among the measures on the table is a huge change to stamp duty that could make it easier for home buyers to pay their bill.
The Chancellor is considering reforms in the Budget that would allow buyers to pay their stamp duty bill over several years, instead of a lump sum.
The proposals are still under discussion and will not be confirmed until Budget day.
The change is one of a series of measures on the table as the Chancellor attempts to plug the gaping hole in the public finances.
Among the other measures that could be announced in the Budget is a new tax on people’s homes that could replace stamp duty and council tax.
Rachel Reeves is said to be considering plans for a levy on homes worth more than £500,000, according to The Guardian.
The Treasury is said to be considering a proportional property tax, which would be paid when owners sell their homes.
It has also been suggested that the reform could pave the way for a new local levy to replace the current council tax system.
Fears have also mounted that the Chancellor could be considering changes to pension tax relief.
She could decide to axe higher-rate tax relief, which could scrap the extra help given to high earners.
At the moment, when you save into a pension, you get tax relief on the money you paid into it, at your personal income tax rate.
But this could be ended and everyone could be given the same flat rate of relief, which is likely to be set at the basic level of 20%.
Meanwhile, they could also cap or abolish the tax-free lump sum.
This allowance allows people to take a quarter of their entire pension pot in one go without paying tax on it.
Doing this could be a big blow to many retirees, who rely on the money to pay off their mortgage or pay down debt.
Finally, reports suggest the Chancellor could also abolish salary sacrifice schemes.
Many employers offer these schemes and allow employees to agree to a slightly lower salary, in return for the company paying that amount into your pension.
As your salary is lower, you and your employer both save money on National Insurance.
But doing away with salary sacrifice could impact more than three million basic-rate taxpayers, who would see their take-home pay fall due to higher National Insurance payments.
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