Government borrowing rose sharply to more than £20bn in September – the highest level in five years – piling further pressure on Chancellor Rachel Reeves as she prepares a tax-raising Budget next month.
According to the Office for National Statistics (ONS), monthly borrowing increased by £1.6bn from August, contributing to a six-month total of £99.8bn, the second-highest level ever recorded for the first half of a financial year. The current budget deficit now stands at £71.8bn.
Debt servicing costs also surged, with interest payments hitting £9.7bn in September. Public debt as a share of GDP climbed to 95.3%, up one percentage point on the year.
The figures come at a critical time for Labour, as the Chancellor attempts to meet strict fiscal rules requiring day-to-day spending to be matched by revenue by 2030 — a target that economists warn could now involve tax rises of at least £25bn–£30bn.
Richard Carter, head of fixed interest research at Quilter Cheviot, said the UK economy was now “in something of a straitjacket”.
“Fiscal headroom is all but non-existent, and growth is being hampered by a high tax burden and uncertainty over further revenue-raising measures,” he said. A recent fall in gilt yields has provided some breathing room, but markets will be watching Reeves closely at the despatch box, he added.
James Murray, Chief Secretary to the Treasury, said the government remained committed to fiscal discipline: “This government will never play fast and loose with the public finances. We plan to bring down borrowing and deliver the largest deficit reduction in the G7 over the next five years.”
Opposition figures, however, accused Reeves of already losing control of the nation’s finances. Conservative Shadow Chancellor Mel Stride said: “If Rachel Reeves had a plan – or a backbone – she would get spending under control instead of plotting yet more tax hikes.”
Economists believe Reeves’s Spring Statement headroom of £9.9bn has been largely wiped out by: higher-than-forecast borrowing costs, revisions to welfare reform savings, and an expected OBR productivity downgrade
John Wyn-Evans, head of market analysis at Rathbones, warned taxes could need to rise by “£25bn or more” unless Labour opts for politically difficult spending cuts.
To soften the impact of expected tax rises, the Treasury is racing to announce pro-growth reforms including:
• A deregulation drive targeting £6bn in business admin savings
• Planning system overhauls
• Regional investment incentives
Some analysts warn the Employment Rights Bill — not yet costed by the OBR — could increase regulatory burdens and dampen corporate confidence.
Reeves has told ministers to prioritise reducing inflation, which is expected to hit 4% for September. Lower inflation could pave the way for earlier interest rate cuts, easing government borrowing costs and calming bond markets.
According to the OBR, the government is projected to spend over £110bn on debt interest in 2025. Any loss of investor confidence would likely trigger further rate pressure — forcing deeper tax rises or spending reductions in future Budgets.
