Rising Public Sector Pay Pushes Government Borrowing to Post-Pandemic Highs, Tax Hikes and Spending Cuts Loom in October Budget

Government debt surpasses forecasts, reaching a peak not seen since the pandemic, fueled by increased public sector wages. Predictions suggest higher taxes and additional reductions in public spending in the upcoming October budget as the Labour government strives to reduce national debt.

Business journalist @taaffems

Wednesday, August 21, 2024, 11:

In July, the amount of money the government borrowed reached its peak since the pandemic began, according to recent official data, driven by a rise in public sector salaries.

Data from the Office for National Statistics (ONS) indicates that borrowing in July reached levels not seen since 2021.

This indicates that there was a £3.1 billion gap between government revenue, like taxes, and its expenditure on public sector services. The government has pledged to limit borrowing exclusively for investment purposes and to reduce debt.

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Over a four-month span, the totals exceeded projections.

The Office for Budget Responsibility (OBR), an independent forecasting group, had projected that borrowing would total £46.6 billion, but it actually amounted to £51.4 billion, exceeding expectations by £4.7 billion.

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What has caused the increase in borrowing?

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Although there was a rise in revenue from income taxes, this was counterbalanced by the higher expenses associated with public services and benefits.

The Office for Budget Responsibility (OBR) has linked this to government departments spending more than anticipated, which seems to be connected to significant increases in public sector wages.

It is anticipated that the pattern of government expenditure will persist.

"Information regarding the spending of the central government is still very tentative during this period. However, it suggests that the spending by departments in 2024-25 might surpass the predictions made in March 2024," stated the OBR.

The ONS noted that the expense of servicing the debt, indicated by the interest payments, decreased.

What is the significance?

In light of recent economic expansion surpassing forecasts, it is anticipated that Chancellor Rachel Reeves will increase certain taxes in her inaugural October budget, addressing a reported £22 billion deficit in the government's finances.

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Today's data and statements from the Treasury are expected to further fuel these anticipations, highlighting the tough decisions that Ms. Reeves must confront.

"Today's numbers further confirm the challenging legacy we received from the previous administration," Treasury Chief Secretary Darren Jones stated.

A £22 billion deficit in this year's government budget, ten years of halted economic growth, and public debt reaching its highest since the 1960s. This situation has led to taxpayers' funds being spent on servicing debt instead of enhancing public services.

"We are making the difficult choices necessary to repair the base of our economy, update our public services, and reconstruct Britain, allowing us to increase the financial means of individuals nationwide."

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Last week's economic data revealed a robust economy, characterized by a decrease in inflation and unemployment rates, alongside stronger growth than initially anticipated.

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