It was easy to mock it as a piece of political grandstanding. On taking office, the Chancellor Rachel Reeves almost immediately discovered a ‘black hole’ in the public finances, and started warning of tax rises in the autumn. To many of her opponents, it looked like pure opportunism. And yet, now it turns out that she was right. The latest data on public finances show that the British government really is running out of cash. There is just one snag. Everything Reeves’s colleagues are doing will make that even worse, and her threatened tax rises won’t raise anything close to enough money to make the numbers add up.
The public sector borrowing figures published by the Office for National Statistics today made for dire reading. The government borrowed £3.1 billion during July, the highest figure for that month since 2021, during the pandemic, and the fourth highest July figure since records began. That was far worse than the £0.1 billion forecast by the Office for Budget Responsibility, or the £1.5 billion forecast by a poll of City economists. The reason? The government spent more money than was expected, and welfare payments were higher than forecast, and while tax revenues also rose it was nothing like enough to cover all the outflows.
That can’t really be blamed on Reeves. She only took office following the election on 4 July. Here’s the problem, however. Everything the new government has done since it took office will push the spending figure even higher. The pay deal for junior doctors may cost as much as £2 billion. The extra money for train drivers could cost £800 million. GB Energy will get £8.5 billion of public funding, and the ‘National Wealth Fund’ will get £7.3 billion. Meanwhile the one significant saving so far, axing the winter fuel allowance for pensioners unless they receive benefits, may end up costing the government even more money, as many more put in a claim. Add it all up, and one point is already clear. The money has already run out, and very soon, at least if it is to retain any shred of credibility, the OBR is going to have to make that painfully clear.
It will, of course, be easy to make the case for tax rises in the autumn. The freeze on thresholds will remain in place, and capital gains tax will inevitably have to rise, as well as extra levies on landlords and the self-employed. If none of that works, and all the evidence tells us that increases in CGT only depress revenue because no one sells any assets anymore, then Reeves will have to confront a harsh truth. The state has run out of cash – and the cuts will have to start.