Britain’s public finances have taken a serious hit, as new figures reveal a significantly larger budget deficit than expected for the 2024/25 financial year. The government borrowed nearly £152 billion — approximately £15 billion more than what was projected just a month ago — reigniting concerns over the sustainability of the country’s economic strategy and fiscal discipline.

The Office for National Statistics (ONS) announced on Wednesday that public sector net borrowing had climbed to £151.9 billion. This figure sharply contrasts with the £137.3 billion forecast in March by the Office for Budget Responsibility (OBR). As a percentage of the country’s economic output, the budget deficit has now reached 5.3% of GDP, up from 4.8% in the previous fiscal year.

This spike places further pressure on Chancellor of the Exchequer Rachel Reeves, whose fiscal plans rely heavily on adhering to strict self-imposed rules that cap borrowing and debt levels. The narrow buffer Reeves has to work with — less than 1% of annual public spending — is now thinner than ever, drawing concern from investors and analysts alike.

Mounting Pressures from Every Angle

The reasons for the swelling deficit are multifaceted. A combination of sluggish economic growth, higher interest payments on government debt, and underperforming tax receipts have all played their part. March alone saw government borrowing reach £16.4 billion — slightly above economists’ expectations — while interest payments for the month soared to £4.3 billion, marking a new record.

Adding to the concern is the fact that income and corporation tax revenues have come in weaker than expected. The broader economy has also been under strain. After a modest recovery in late 2024, the private sector has once again contracted, with the services and manufacturing sectors both showing signs of slowdown.

A key driver of this economic softness has been the increasing impact of global tensions. The reintroduction of US tariffs and an emerging trade war have led to falling export orders, hitting British manufacturers particularly hard. Domestically, businesses have become more cautious, limiting hiring and investment — which in turn has affected tax revenues.

A Delicate Fiscal Balancing Act

For Chancellor Reeves, the situation presents a high-stakes dilemma. While maintaining fiscal discipline is crucial to prevent further market volatility and keep borrowing costs under control, there is also growing pressure to support public services and economic growth through increased spending.

In recent months, the government has tried to strike this balance by introducing targeted tax changes. From April 2025, employers’ National Insurance Contributions have increased from 13.8% to 15%, with the income threshold at which they begin also lowered — from £9,100 to £5,000 annually. These changes are aimed at boosting tax receipts without relying on cuts to public spending. To cushion the impact on small businesses, the Employment Allowance — which offsets NICs for eligible firms — has been raised from £5,000 to £10,500.

Another potential avenue for raising funds is through changes to customs regulations. The government is currently reviewing the tax-free threshold for low-value imports, which allows goods worth under £135 to enter the UK without customs duties. While any adjustment could increase government revenue and address unfair competition with domestic retailers, it risks adding to the cost of living for consumers.

Market Reactions and Investor Sentiment

The bond market has taken notice. Yields on British government debt have become increasingly volatile as investors digest the growing gap between borrowing needs and revenue generation. Although the government has thus far resisted issuing more long-term gilts, the Debt Management Office has announced plans to increase the issuance of short-term Treasury bills — a sign that the government is trying to avoid locking in high borrowing costs for decades to come.

However, short-term borrowing may only offer temporary relief. The UK’s public sector net debt now sits at 95.8% of GDP — a level not seen in over six decades. This elevated debt ratio makes the country more sensitive to interest rate fluctuations and reduces the flexibility to respond to future economic shocks.

Financial analysts and economists are sounding the alarm. The Institute for Fiscal Studies (IFS) recently warned that operating with such a slim margin — just £10 billion of headroom under current fiscal rules — leaves the country exposed. Should the economic outlook deteriorate further, or if borrowing costs rise faster than expected, the government could be forced to either raise taxes again or cut spending in politically sensitive areas.

Political Ramifications

The deficit overshoot could not have come at a more politically delicate time. With a general election looming in the next 12 to 18 months, the governing party faces a tightrope walk between fiscal prudence and electoral appeal. Any hint of austerity could prove deeply unpopular, particularly at a time when public services, including the NHS and education, are already under strain.

On the other hand, failure to rein in the deficit risks handing opposition parties ammunition to question the government’s economic competence. The Labour Party has already begun to frame the latest figures as evidence that the Conservative-led government has lost control of the economy, despite Reeves’ commitment to responsible budgeting.

Deputy Finance Minister Darren Jones has tried to reassure the public, stating, “We will never play fast and loose with the public finances. That’s why our fiscal rules are non-negotiable.” But with borrowing already surpassing forecasts and economic growth remaining stubbornly weak, that commitment will face serious tests in the months ahead.

Looking Ahead

Much will now depend on the trajectory of the UK economy over the remainder of 2025. If recent tax hikes generate the expected boost to revenue and economic conditions stabilise, it may be possible to get back on track. But downside risks remain substantial.

Global trade tensions, domestic inflationary pressures, and potential interest rate hikes by the Bank of England all loom large. The central bank has thus far held rates steady, but a resurgence in inflation could force its hand, increasing debt servicing costs even further.

There is also uncertainty surrounding productivity and wage growth. If wages stagnate while inflation persists, consumer spending could fall, hitting VAT and income tax revenues. At the same time, demands for higher public sector pay are growing, adding further strain to the budget.

In the best-case scenario, stronger-than-expected growth in the second half of the year and effective implementation of tax reforms could reduce borrowing pressures. But in the more likely scenario — one of tepid growth and high financing needs — the government may have to revisit its fiscal strategy, whether it wants to or not.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

24th April, 2025