Reeves Borrows £5.3bn Less Than Forecast as Tax Hikes Narrow Deficit
Chancellor Rachel Reeves has overseen lower government borrowing than the Office for Budget Responsibility forecast for the financial year 2024 to 2025, according to newly released data. The figures point to the significant effect sweeping tax hikes have had in narrowing the deficit, though borrowing for March exceeded expectations and long-term fiscal risks loom.
Borrowing Below Forecast as Tax Receipts Surge
The Office for National Statistics revealed that government borrowing over the last financial year totaled £132bn, which is £5.3bn less than the fiscal watchdog's forecast of £137.3bn. This reduction comes as tax receipts jumped by 9.1 percent over the financial year, equivalent to £87.7bn in cash terms compared to the previous year.
In March alone, tax receipts were 5.6 percent higher than in the same month the year before. The current budget deficit was £50.9bn, representing a reduction of one-third from last year's gap and coming in at 1.7 percent of GDP.
March Borrowing Exceeds Expectations
Despite the overall positive annual figures, borrowing for the month of March was higher than anticipated. Economists polled by Bloomberg had penciled in a deficit of around £10bn, but the actual reading came in at £12.6bn. Debt interest costs were slightly lower than in February, but public sector debt as a share of GDP stood at 93.8 percent, higher than in the financial year ending in 2025.
These figures close an eventful financial year for Reeves and her Treasury team that began with sweeping tax hikes on employers and ended with questions about the security of public accounts amid ongoing geopolitical tensions.
Government Denies Windfall Tax Reports
The government has firmly denied reports suggesting it could generate windfall income from higher energy prices through taxes on oil and gas producers' profits. Prime Minister Keir Starmer dismissed the suggestion from the Liberal Democrats as "politically misleading and economically illiterate."
Meanwhile, Reeves has used recent weeks to argue that diplomacy remains the "best" economic policy for the government to pursue, even as calls grow for a support package to be rolled out to poorer households suffering from skyrocketing fuel prices.
Headroom Warning from Resolution Foundation
The left-leaning Resolution Foundation estimated this week that government borrowing could be £16bn higher by 2030, which would significantly shrink the size of Reeves' £22bn fiscal headroom. Their "severe" scenario suggests the UK economy's long-term growth could be negatively impacted by the continuation of geopolitical conflicts, with interest rates inching higher and equity prices dropping.
Simon Pittaway, senior economist at the think tank, acknowledged that Reeves deserved credit for building a larger fiscal buffer in last year's Budget. However, he warned that looming risks including potential drops in tax receipts due to falling net migration levels and lower-than-expected growth could leave public finances in a precarious position by autumn.
Military Officials Target Reeves Over Defence Funding
Calls for departmental spending increases are also putting pressure on the Chancellor. Lord George Robertson, the former NATO chief and Labour defence secretary who authored a review into the armed forces, has criticized Reeves for failing to provide sufficient funding for the military.
The government has not yet detailed how it plans to reach the NATO target of spending 3.5 percent of GDP on defence by 2035. Military officials have warned Prime Minister Starmer that there is a multi-billion pound shortfall in funding over the next four years, adding to the fiscal challenges facing the Treasury.
As the new financial year begins, Reeves faces mounting pressure from multiple fronts—balancing the need to maintain fiscal discipline while addressing growing demands for increased spending across various government departments, all against a backdrop of economic uncertainty and geopolitical tensions.
