Downing Street has issued a fresh warning about Budget pain as tax rises and spending cuts loom next week.
New borrowing figures were released on Tuesday that No 10 said proved its claim about a so-called “black hole” in the public finances and the need for “tough decisions to “restore economic stability”.
It came as the IMF urged the UK to “bring debt levels down” and warned that the public finances could “quickly slip out of control” if the government does not take action.
Official figures on Tuesday showed that government borrowing hit £16.6bn in September, marking the third-highest September since records began in 1993.
The figure was above the £15.1bn forecast by the Office for Budget Responsibility (OBR), continuing a trend of official figures overshooting the OBR forecast for every month since June.
In the Budget, Rachel Reeves is expected to unveil a host of tax rises, including increasing capital gains tax on certain assets, raising inheritance tax and continuing the freeze on income tax thresholds.
An increase in employer national insurance contributions is also expected, with Labour insisting this would be consistent with the promise it made in the election campaign not to raise taxes on “working people”.
Tuesday’s borrowing figures arrived after the OBR’s cut-off point to calculate how much “headroom” Ms Reeves will have in the Budget to stick within the Government’s fiscal rules, meaning it will not change the measures the Chancellor will announce on 30 October.
However, the Government said the run of higher than expected borrowing figures corroborated its claim of an in-year overspend which would require plugging in the Budget.
The Prime Minister’s official spokesman told i that the figures were “proof of the £22bn black hole that the Government inherited in the public finances”.
He went on: “The Government will obviously address the situation that it inherited in the public finances in the Budget, because it’s only by taking the tough decisions now to fix the foundations of our economy that we can restore economic stability that investors and businesses desperately need, so that we can rebuild Britain and make every part of the country better off.”
The borrowing figures came as the IMF urged the Chancellor to ensure that she uses her Budget to bring the public finances under control – imposing higher taxes and spending cuts if necessary.
Chief economist Pierre-Olivier Gourinchas warned that the UK’s public finances could “slip out of control quickly” if the Government does not take action.
Asked for his view on what Britain’s fiscal policy should be, Mr Gourinchas said: “When countries have elevated debt levels, when interest rates are high, when growth is OK but not great, there is a risk that things can slip out of control quickly and so there is a need to bring debt levels down, stabilise them when they are not stabilised, and restore fiscal buffers.
“That is true for many countries around the world, and if you are not doing that, that is when you find yourself later on at the mercy of market pressures that will force an adjustment that is uncontrolled to a large extent, at which point you have very few degrees of freedom. So you don’t want to get in that position and I think the effort to stabilise public debt has to be seen in that context.”
He added that governments should continue to prioritise long-term investment and adequate spending on public services, but concluded: “We are in a world where there will be more shocks, and countries need to be more prepared and need to have more fiscal room to deal with them.”
Commenting on the borrowing figures, Darren Jones, Chief Secretary to the Treasury, said: “We have inherited a £22bn black hole in the country’s public finances, including no plan to fund pay deals for millions of public sector workers.
“Strikes cost at least £3bn last year, so it was the right thing to do to end those damaging disputes. Resolving this black hole at the Budget next week will require difficult decisions to fix the foundations of our economy and begin delivering on the promise of change.”
According to the Resolution Foundation think-tank, the additional borrowing was mostly accounted for by higher spending on public sector pay and procurement, which is now £9.7bn higher than expected for the year.
The think-tank added: “The crucial thing to remember about all of this is that it’s not borrowing this year that matters for the Government’s fiscal rules and spending power – it’s the fiscal position over the medium-term.
“We can expect medium term-fiscal pressures to total at least £20-30bn, making tax rises all but inevitable, and facing the Chancellor with difficult choices.”