Rachel Reeves was today warned to avoid a ‘doomed loop’ of spending cuts as a surge in government borrowing delivered a fresh blow to the beleaguered Chancellor.
Borrowing – the shortfall between tax revenues and spending – hit £17.8 billion in December, £10.1 billion up on last year and £3.7 billion above a forecast by the Office for Budget Responsibility (OBR).
For the nine months of the 2024/25 financial year to date it was £129.9 billion, £4.1 billion higher than the OBR’s projection at the time of last autumn’s Budget.
The parlous state of the public finances will pile the pressure on the Chancellor to consider spending cuts or tax hikes later this year.
And comments from Andy Haldane, former chief economist at the Bank of England, put the case for not turning to cuts – implying that taxpayers will again have to bear much of the strain.
Mr Haldane told Sky News: ‘It would be deeply counterproductive to both growth and to the fiscal position if that led to a cutting back on investment and indeed in spending more generally.
‘Then I think you really are into a doomed loop between debt and growth. And that’s a situation to avoid at all costs.’
Ms Reeves faces tough choices when the OBR delivers its next update on the state of the public finances in March.
The Chancellor already has only a relatively narrow amount of ‘headroom’ for meeting her fiscal rules, of £9.9 billion.
A recent rise in the cost of government borrowing on financial markets, combined with the likelihood of a downgrade in the UK’s growth outlook, suggest that headroom may be wiped out and she may even be left with a negative ‘black hole’.
Elliott Jordan-Doak of Pantheon Macroeconomics said: ‘The Chancellor is already under pressure to clarify how the Government will meet its new fiscal rules.
‘We expect the Government to outline spending reductions – backloaded towards the end of the forecast year – at the next fiscal event in March.
‘Further tax increases at the next Budget in October, is also a good bet.’
Yesterday, the Chancellor refused to rule out the possibility that she might target pensions by reducing the tax-free lump sum that can be withdrawn at the age of 55, or cutting tax relief for employees in the higher tax bracket.
Speculation about such moves had prompted some savers to panic ahead of the last Budget.
Asked by the Mail she was not ruling them out now, she said: ‘As I didn’t last time – it [the speculation] was misplaced last time.’
Ms Reeves yesterday told a Bloomberg event at the World Economic Forum in Davos that ‘difficult decisions’ taken in October’s Budget – which included £40 billion worth of tax rises – had brought the public finances ‘under control’.
The Chancellor said she would not apologise for the Budget, saying critics had offered no alternative, and said her instinct was ‘to have lower taxes’.. But she admitted the headroom she had was ‘tight’.
Ms Reeves talked up the ambition to get ‘better value’ from public services using new technology.
She added: ‘The more costs we can take out, the less we have to do on the tax side, the better services we can deliver for citizens.’
The Chancellor brushed off a comparison between her approach and that of Elon Musk, the billionaire Tesla boss tasked by Donald Trump by improving government efficiency.
‘We want to root out waste in government spending but I think the comparison ends there,’ Ms Reeves said.