The government's unexpected record borrowing will hit us all – but where?

Independent

22-07-2025

For Rachel Reeves, the hits keep on coming. The latest? Higher than expected government borrowing last month.
The figures are enough to make anyone wince. The government spent £20.7bn more than it received in tax receipts in June, which is the second highest figure since monthly records began in 1993 – and £6.6bn more than in the same month in 2024.
To put it in context: that number would cover the government's share of building the £38bn Sizewell C nuclear power plant, with enough change left over to throw in a new hospital or two. In just a month.
You can probably guess when it was worse: June 2020, slap bang in the middle of the pandemic when the state was subsidising the wages of the furloughed British workforce. The extra debt incurred as a result of that is a major cause of the problems the chancellor is currently grappling with.
The consensus forecast in the City was for borrowing of £17.5bn, but it should be said at this point that these figures are highly volatile, and tough to predict. The overshoot was principally caused by higher interest payments on the vast existing debt pile, particularly IOUs linked to the Retail Prices Index (RPI), an outdated and statistically dubious measure of inflation that is still making its presence felt in a very bad way.
I said the hits keep on coming for the chancellor. But they're coming for us, too. Unless things improve, Reeves is going to have to sit down with her team to come up with some new and exciting ways to shaft us in the autumn Budget.
The electorate won't easily forgive having its bills raised again. Trouble is, the way the public finances are going, the chancellor mightn't have much choice. The markets, which Britain relies on to fund its debt, are getting twitchy about the state of its public finances. Only a fool would take them on. Consider what happened to the fool who tried (that would be Liz Truss).
'Ten-year gilt yields briefly nudged up to 4.645 per cent, which is the market's way of saying it isn't impressed with the state of public finances,' said Russ Mould, from broker AJ Bell. 'Soaring debt interest payments haven't helped and the situation will further stir speculation that the government will have to put up taxes in the autumn Budget.'
Speculation or certainty? The cry of ' tax the rich, they can afford it' will inevitably be heard. But there aren't enough of them to make a meaningful dent in the numbers, plus they'll be off if they get hit too hard. Reeves tried taxing businesses last time around, by hiking employer's national insurance contributions. Rising unemployment was the entirely predictable result.
So now it's on you and me.
I suspect that the thresholds at which people move into higher tax bands will remain frozen, which might well mean that next year's pay rise is worth a lot less than you hoped. What else? A raid on savings is possible. There has also lately been speculation about wealth taxes, with little to suggest how they might work.
Reeves probably should raise fuel duty, which has been frozen forever and would raise a decent slug of cash, but I doubt that she will, She keeps promising not to hit 'working people', which that would do
So I think stealth taxes will be the order of the day. Except, that people are getting wise to those. They see their impact in the diminishing amount left over at the end of the month after accounting for essentials, the price of which is rising uncomfortably fast. Kantar, the researcher, says the average family spends more than £5,000 annually on food with its measure of food price inflation jumping to 4.7 per cent.
It does rather look like Number 11 is caught in Catch 22 situation in which almost every possible decision is bad, both economically and politically.
But, wait – is there a way out?
Well, as I said, these figures tend to be highly volatile. Inflation is also expected to fall in the tail end of the year, which means the cost of interest on those index linked bonds will fall. The Bank of England is expected to cut base rates, which will further help with the chancellor's debt interest bills.
One final point to consider: while these figures were higher than the City expected, the government's borrowing in the current financial year (which starts in April) is still in line with the forecasts of the Office for Budget Responsibility, the 'independent' agency set up to mark the homework of Britain's finance ministers. That matters.
So cross you fingers. This could yet turn around. Anything's possible, and if our economic fairy godmother is feeling kind, for a change we mightn't get hit quite so hard. But don't bank on it.