Inflation-busting public sector pay rises have helped fuel a surge in borrowing in a major headache for Rachel Reeves.
Official figures show government borrowing has rocketed to £79.6 billion – £1.2 billion more than a year earlier and £6.7 billion higher than forecast.
It hit a staggering £16.6 billion last month, marking the third highest September since records began.
The Office for National Statistics Public sector pay rises were behind the latest surge, even before the latest deals announced by Sir Keir Starmer’s Government in July are taken into account
Borrowing figures (Image: PA)
Jessica Barnaby, the ONS deputy director for public sector finances, said: “While tax revenue increased, this was outweighed by increased spending, partly due to higher debt interest and public sector pay rises.”
The Government announced a series of huge public sector pay rises within eight weeks of Labour taking office in July, with boosts of 5.5% handed to teachers and nurses, 6% to Armed Forces personnel, 5% to prison service workers and 4.7% to the police.
Senior NHS managers were given a 5% pay rise.
The Chancellor is also thought to be planning a raid on National Insurance in the Budget as one of several tax rises to help raise £40 billion, which is far more than the £22 billlion fiscal hole she claims to have inherited from the Conservatives.
Darren Jones, the 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 £3 billion last year, so it was the right thing to do to end those damaging disputes.”
Borrowing data (Image: PA)
Public sector net debt excluding public sector banks reached around 98.5pc of the UK’s annual gross domestic product.
Ms Reeves has signalled plans to announce changes in the upcoming Budget to the fiscal rules, which provide discipline on borrowing and spending, to allow her to borrow more to finance projects in sectors such as housing, roads and energy.
Experts said the rules will need to be changed as government spending soars but in a way that does not spook financial markets and risk a re-run of the mini-Budget meltdown caused by former prime minister Liz Truss.
The Resolution Foundation economic think tank said Government spending so far this financial year was £11.5 billion more than forecast by the OBR, which tallies with Ms Reeves’ claim of a £22 billion “black hole” in the public finances.
The foundation’s senior economist, Cara Pacitti, said: “Today’s data highlights the scale of the public finances challenges facing the Chancellor as she grapples with overspending today, the need to avoid austerity in the future, and having to fund extra public service spending through tax rises.”