The tax effect: Reeves borrowed less than OBR forecast
Chancellor Rachel Reeves oversaw lower government borrowing than the Office for Budget Responsibility forecast in the financial year 2024 to 2025, it has been revealed, pointing to the effect sweeping tax hikes have had in narrowing the deficit.
The Office for National Statistics has shown that government borrowing over the last financial year was £132bn compared to the fiscal watchdog’s forecast of £132.7bn.
The current budget deficit was £50.9bn, stripping a third off last year’s gap and coming into 1.7 per cent of GDP.
Tax receipts were 5.6 per cent higher last month than in the year before. Over the financial year, combined receipts jumped by 9.1 per cent, or £87.7bn in cash terms, compared to the year before.
Inheritance tax receipts marked a fifth consecutive annual record while capital gains taxes also hit an all-time high, beating an OBR forecast.
The official body also found that borrowing for the month of March was higher than expected. Economists polled by Bloomberg pencilled in a deficit of around £10bn compared to an actual reading of £12.6bn.
Debt interest costs came in slightly lower than in February. Public sector debt as a share of GDP was 93.8 per cent, higher than in the financial year ending in 2025.
Chief secretary to the Treasury, James Murray, said: “Our deficit is down £19.8bn because of our plan to cut borrowing. In a volatile world the decisions we are taking are the right ones to keep costs down, take back our energy security and cut borrowing and debt.
“We’re also reforming our public services to boost productivity, making them more efficient and delivering more for working people for less, while protecting our record £120bn investment in capital spending.”
Public finances crunch
The figures close off an eventful financial year for Reeves and her team at the Treasury that began with sweeping tax hikes on employers and ended with questions over the security of public accounts given the war.
The government has denied reports that it could get windfall income from higher energy prices through taxes on oil and gas producers’ profits.
The Prime Minister said the suggestion from the Liberal Democrats was “politically misleading and economically illiterate”.
Reeves has meanwhile used the last weeks to argue that diplomacy remained the “best” economic policy to be pursued by the government amid calls for a support package to be rolled out to poorer households suffering from skyrocketing fuel prices.
Headroom warning
The left-leaning Resolution Foundation estimated this week that government borrowing could be £16bn higher by 2030, shrinking the size of Reeves’ £22bn headroom.
Its “severe” scenario found that the UK economy’s long-term growth could be hit by the continuation of the war, with interest rates inching higher and equity prices dropping.
Simon Pittaway, senior economist at the think tank, said Reeves deserved credit for building a larger fiscal buffer in last year’s Budget.
The looming risks of tax receipts dropping due to falling net migration levels and lower growth than expected could leave the public finances in a precarious position by the autumn.
Capital Economics deputy chief UK economist Ruth Gregory believe the Iran war could lead borrowing to overshoot the OBR’s forecast for the next year by £29bn and strip around £13bn off Reeves’ headroom.
Military officials target Reeves
Calls for departmental spending increases could also put Reeves under pressure.
Lord George Robertson, the former Nato chief and Labour defence secretary who authored a review into the armed forces, took aim at the Chancellor for failing to give the armed forces enough funding.
The government has not yet set out how it would reach a Nato target to spend 3.5 per cent of GDP on defence by 2035 while military officials have warned Starmer that there is a multi-billion pound shortfall in funding over the next four years.