Experts warn Labour set to hike taxes as borrowing hits record figure
May borrowing was £700 million higher than a year earlier, though it was slightly less than the £18bn most economists had been expecting.
The higher borrowing came in spite of a surge in the tax take from National Insurance after Chancellor Rachel Reeves increased employer contributions in April.
The decision, which was announced in last autumn's budget, has seen wage costs soar for firms across the UK as they also faced a minimum wage rise in the same month.
Experts warned the higher borrowing figures raised the chances of tax hikes to come in the budget later this year, with Reeves struggling to meet her self-imposed fiscal rules alongside spending commitments.
(Image: Wikimedia)
Thomas Pugh, economist at audit and consulting firm RSM UK, said he is predicting tax increases of between £10bn and £20bn.
He said: 'The under-performance of the economy and higher borrowing costs mean the Chancellor may already have lost the £9.9bn of fiscal headroom that she clawed back in March.
'Throw in the tough outlook for many Government departments announced in the spending review and U-turns on welfare spending and the Chancellor will probably have to announce some top-up tax increases after the summer.'
Danni Hewson, AJ Bell head of financial analysis, said the borrowing figures 'will only add to speculation that the Chancellor will have to announce more spending cuts or further tax increases at the next budget if she wants to meet her fiscal rules and pay for her spending plans'.
'One big shock could wipe out any headroom Rachel Reeves might have, and there are still question marks about how much of GDP [gross domestic product] should be spent on defence and where the money is going to come from,' she added.
READ MORE: Labour whip resigns over government's planned disability welfare cuts
Borrowing for the first two months of the financial year to date was £37.7bn, £1.6bn more than the same two-month period in 2024, according to the ONS.
The data showed so-called compulsory social contributions, largely made up of national insurance contributions (NICs), jumped by £3.9bn or 14.7% to a record £30.2bn in April and May combined.
Rob Doody, deputy director for public sector finances, said: 'While receipts were up, thanks partly to higher income tax revenue and national insurance contributions, spending was up more, affected by increased running costs and inflation-linked uplifts to many benefits.'
While May's borrowing out-turn was lower than economists were expecting, it was more than the £17.1bn pencilled in by the UK's independent fiscal watchdog, the Office for Budget Responsibility (OBR), in March.
The figures showed that central government tax receipts in May increased by £3.5bn to £61.7bn, while higher NICs saw social contributions rise by £1.8bn to £15.1bn last month alone.
Public sector net debt, excluding public sector banks, stood at £2.87 trillion at the end of May and was estimated at 96.4% of GDP, which was 0.5 percentage points higher than a year earlier and remains at levels last seen in the early 1960s.
The ONS said the sale of the final tranche of taxpayer shares in NatWest, formerly Royal Bank of Scotland, cut net debt by £800m last month, but did not have an impact on borrowing in the month.
Interest payments on debt, which are linked to inflation, fell £700m to £7.6m due to previous falls in the Retail Prices Index (RPI).
But recent rises in RPI are expected to see debt interest payments race higher in June.
Chief Secretary to the Treasury Darren Jones insisted the Government had 'stabilised the economy and the public finances'.
'Since taking office, we have taken the right decisions to protect working people, begin repairing the NHS, and fix the foundations to rebuild Britain,' he said.
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Nicholas Mendes, mortgage technical manager at broker John Charcol, said: 'The decision to widen access to Nationwide's Helping Hand mortgage by lowering the income thresholds will offer an immediate and practical benefit to a group of people who have often found themselves just on the wrong side of affordability criteria. 'For someone earning £30,000 on their own, or couples on a combined income of £50,000, this change could be the difference between continuing to rent and finally being able to move into a home of their own. 'It acknowledges the gap between headline figures and real life, and it shows a willingness to make the system better reflect the pressures people are actually under. 'It will also bring particular value to those in stable, lower-paid roles that are so essential to society but are often overlooked by traditional lending models. 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