Debt hits 100pc of national income for first time since 1960s

Britain’s debt is now equal to the size of the economy for the first time since the 1960s, as economists warned that a string of public sector pay deals would push borrowing even higher.

In a blow to Rachel Reeves, the Chancellor, official figures also showed borrowing so far this year was £6.2bn higher than expected.

“Debt was provisionally estimated to be equal to the annual value of everything produced in the UK economy,” the Office for National Statistics (ONS) said on Friday.

The increase in total debt from 95.7pc of GDP a year earlier represents a psychologically important moment that underscores the challenge facing the Chancellor ahead of her Oct 30 fiscal statement.

The ONS said higher spending on public services, including pay and benefits, drove the deficit higher in August. The increased spending comes even before the impact of recent large pay settlements for public sector workers including junior doctors and train drivers.

The Government borrowed £13.7bn last month to plug the gap between taxes and spending. This was higher than the £11.2bn forecast by the Office for Budget Responsibility (OBR), the Government’s tax and spending watchdog, and represents the third-highest August borrowing since monthly records began in 1993.

It brings the total borrowed so far this year to £64.1bn, which is £6.2bn more than the £57.8bn forecast by the OBR back in March.

“Higher-than-expected borrowing continues to be driven by departmental spending ... which is £8.5bn above forecast,” the OBR said on Friday.

While income tax receipts are higher than predicted by the OBR in March, reflecting “stronger earnings growth than anticipated”, self-assessment income tax receipts have disappointed and VAT receipts are also lower than predicted amid weaker consumer spending.

Pay deal strain

The ONS said the latest figures did not account for the inflation-busting pay deals announced by Ms Reeves in the first few weeks in office.

The pay rises include a 5.5pc increase for teachers and NHS staff and 4.75pc for police officers, which take effect in either September or October. While increases will be backdated to April, the ONS only accounts for pay deals when they are actually implemented.

Junior doctors and train drivers have also both received double-digit settlements, with £11.6bn earmarked to fund pay deals since Labour came to power.

The generous settlements are driving a £22bn black hole in the public finances amid significant departmental budget overspends that Ms Reeves says were presided over by the Tories.

Matt Swannell, the chief economic adviser to the EY Item Club, said public spending was likely to ramp up even further in the coming months.

He said: “The Government will likely have to increase spending over the next few months, due to a combination of accepting the recommendations for higher pay increases from public sector pay boards and non-labour cost overruns across a range of government departments.”

Economists are expecting up to £20bn of tax rises in the Budget to fund higher spending. George Buckley said borrowing could rise in the near term to meet any shortfalls.

He said: “If the Government struggles to fully fund higher public sector pay rises and other spending through increased taxes, then the strain may yet be felt in higher debt and deficits.”

Alex Kerr, an economist at Capital Economics, added: “Although the Chancellor announced £5.5bn of immediate cuts to spending in her statement to Parliament at the end of July, this does not offset the estimated £11.6bn per year cost of the public sector pay deals she announced.

“So all else equal, in the absence of cuts to spending elsewhere or tax rises, this would increase government borrowing and therefore debt in the coming years.”

However, analysts said an improving economic backdrop would give Ms Reeves more space to meet her so-called fiscal rules. There is also speculation that she will change these rules to give her even more space to meet them.

A move by the Bank of England to slow down active bond sales next year is also expected to free up an additional £10bn that peers have urged the Chancellor to use to reverse cuts to winter fuel payments.

Commenting on the figures, Darren Jones, the chief secretary to the Treasury, said: “When we came into office, we inherited an economy that wasn’t working for working people. Today’s data shows the highest August borrowing on record, outside the pandemic.

“Debt is 100pc of GDP, the highest level since the 1960s. Because of the £22bn black hole in our public finances we have inherited this year alone, we are now taking the tough decisions now to fix the foundations of our economy, so we can rebuild Britain and make every part of the country better off.”