UK Borrowing Falls in June but Public Finances Remain a Challenge

The UK government’s latest borrowing figures have offered a rare respite from the gloom that has characterized public finances in recent years. According to official data, the country’s borrowing fell by £7.9 billion in June compared to the same month last year, reaching £16 billion – slightly below expectations.

However, this may seem like cause for celebration only if viewed in isolation. The UK’s total debt remains a staggering near-£3 trillion, equivalent to nearly the entire annual value of its economy. This sobering reality highlights the country’s financial vulnerability and underscores the need for policymakers to address the underlying issues driving borrowing and debt levels.

The Office for National Statistics (ONS) has highlighted that June’s borrowing figure was partly driven by higher revenues from income tax and VAT, as well as lower interest payments on inflation-linked debt. However, these one-off factors mask the persistent challenges plaguing the UK’s public finances. The ONS also noted that total debt remains near £3 trillion, a stark reminder of the country’s financial fragility.

Economists are divided on what this means for the new prime minister and his chancellor as they begin to set out their policies. Some argue that June’s borrowing figure offers a rare glimmer of hope in an otherwise bleak landscape. Ruth Gregory, deputy chief UK economist at Capital Economics, described it as “a rare piece of good news” for the new government.

However, others caution that this is little more than a temporary reprieve from the challenges facing the public finances. James Smith, chief UK economist at ING, warns that the new chancellor and prime minister will face a difficult picture at the autumn budget, with “lots of tough choices to be made.” The fact that borrowing is still running ahead of the Office for Budget Responsibility’s (OBR) projections raises concerns about the government’s ability to stick to its fiscal rules on spending and borrowing.

The new prime minister has pledged to use “any flexibility within” these rules to help with policy changes, but this approach risks undermining the credibility of the UK’s fiscal framework. As Healey noted in a statement released last Monday, “fiscal credibility is the bedrock for economic stability and for national security.” The yield on 10-year government bonds has already risen above 5% following Burnham’s comments, a sign that markets remain skeptical about the government’s ability to manage its finances.

The new leadership’s first major policy announcement – cutting VAT on household electricity bills from 5% to zero in October – raises concerns about fiscal credibility. Labour’s Darren Jones accused the government of announcing an unfunded tax cut, which will be funded by savings from the cancellation of the digital ID programme. This move may provide short-term relief for households struggling with energy costs but risks exacerbating long-term debt issues.

The subdued wage growth in the private sector has significant implications for workers’ bargaining power and living standards. As Yael Selfin, chief economist at KPMG, noted, “workers are also set to see a renewed squeeze on living standards during the second half of the year as higher energy costs feed through to household bills.” This underscores the need for policymakers to focus on addressing long-term economic challenges rather than relying on temporary fixes.

As the UK government navigates these complex financial waters, one thing is clear: there’s no escaping the fact that public finances remain fragile. The new prime minister and chancellor must demonstrate a deep understanding of the underlying issues driving borrowing and debt levels, and develop policies that address these fundamental problems rather than just treating symptoms.