Rachel Reeves was urged to use next week’s budget to create significantly more headroom against her fiscal rules, after official figures showed the UK government borrowed almost £10bn more than forecast in the year to October.
In the final snapshot of the public finances before the chancellor’s crunch budget, the Office for National Statistics (ONS) said borrowing – the difference between public spending and income – was £17.4bn last month.
That was lower than the same month last year, but still the third-highest October deficit on record.
In the fiscal year so far, borrowing was running at £116.8bn, the ONS said – £9.9bn more than the independent Office for Budget Responsibility (OBR) expected the government would be borrowing at this point. It will publish new forecasts alongside the budget next week.
Martin Beck, the chief economist at the consultancy WPI Strategy, said: “As things stand, total borrowing in 2025-26 could overshoot the OBR’s full-year forecast by around £10bn, pushing the deficit close to 5% of GDP.
“Combined with policy U-turns, market movements, and a deteriorating productivity outlook, the chancellor’s headroom against her fiscal rules has almost certainly vanished.”
The bond markets are a key audience for next Wednesday’s budget, and will be paying close attention to how much “headroom” Reeves has left herself against her fiscal rules, at the end of the forecast period in five years’ time.
Nick Ridpath, a research economist at the Institute for Fiscal Studies, said the fact the deficit was running so far ahead of OBR projections made as recently as March emphasised the need for a larger financial buffer.
“Forecasts for the level of borrowing this year are subject to considerable uncertainty, never mind those for borrowing in four or five years’ time,” he said.
“Operating with minimal fiscal margin for error is risky, and this is one reason why the chancellor might sensibly take steps to increase her so-called ‘fiscal headroom’ at next week’s budget.”
Russell Shor, senior market analyst at trading platform Tradu.com, said the size of the headroom would be a key test for government bonds, or gilts.
“Gilt yields saw their biggest jump since July last Friday after reports that income-tax rises had been dropped, turning the budget into a crucial test of fiscal discipline, particularly whether Reeves can unlock roughly £20bn of headroom without unsettling sentiment,” he said.
The ONS said central government spending was £3.7bn higher in October than a year ago – pointing to rising benefits payments because of higher-than-expected inflation, and pay increases for public servants.
Reeves will deliver her second budget on Wednesday against a difficult political background, after the Treasury floated and then ditched plans to raise income tax.
She is still expected to raise taxes significantly, in response to a downgrade in economic forecasts from the OBR, and in order to increase the £10bn headroom against her fiscal rules.
The chief secretary to the Treasury, James Murray, said the data underlined the importance of Reeves’s efforts to bring the public finances under control.
“Currently we spend £1 in every £10 of taxpayer money on the interest of our national debt. That money should be going to our schools, hospitals, police and armed forces. That is why we are set to deliver the largest primary deficit reduction in both the G7 and G20 over the next five years – to get borrowing costs down,” he said.
The ONS said the government had to pay £8.4bn in debt interest in October – as payments on inflation-linked gilts, or government bonds, were larger than expected due to continued high inflation.
Alongside tax rises, Reeves is also expected to deliver a package of cost of living measures in the budget, aimed at bringing inflation down. As a first step, she announced on Friday that prescription charges will be frozen for another year.
Reeves’s first fiscal rule says she should try to bring the current budget into surplus by 2030 – so that day-to-day spending is matched by revenues. The ONS said the deficit on this measure was £12.6bn in October, £2.6bn more than forecast by the OBR.
The shadow chancellor, Mel Stride, said: “If Labour had any backbone, they would control spending to avoid tax rises next week. While Labour plan to spend more and more, Conservatives would cut the deficit and cut taxes with our golden economic rule and our £47bn savings plan.”
The worse-than-expected borrowing figures came as official retail sales data showed an unexpected 1.1% month-on-month decline in October, the first fall since May, with some analysts blaming consumer jitters before the budget.
