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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Economists predict higher taxes and borrowing after UK deficit overshoots forecasts – as it happened

United Kingdom United States Rachel Reeves Darren Jones Office for National Statistics
Chancellor of the Exchequer Rachel Reeves speaking during a press conference at the Treasury on July 29.
Chancellor of the Exchequer Rachel Reeves speaking during a press conference at the Treasury on July 29. Photograph: Lucy North/AFP/Getty Images

Closing post

Time for a recap…

Strong spending on public services and welfare pushed UK government borrowing to £3.1bn last month, more than double its level in the same month a year earlier and worse than experts had expected.

Fuelling the row between Labour and the Conservatives over the health of the public finances, the deficit was the highest for a July in three years and £3bn higher than expected by the government’s spending watchdog, the Office for Budget Responsibility (OBR).

The Office for National Statistics (ONS) said strong growth in public spending was the main factor behind the borrowing overshoot.

Jessica Barnaby, the ONS deputy director for public sector finances, said:

“July borrowing was almost £2bn higher this year than in 2023. Revenue was up on last year, with income tax receipts in particular growing strongly.

“However, this was more than offset by a rise in central government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.”

More here

In other news…

US jobs payrolls revised down by 818,000

Newsflash: The US economy has created more than 800,000 fewer jobs than previously thought.

The Bureau of Labor Statistics has just released its latest revisions to its monthly non-farm payroll statistics, the official measure of US employment.

And… it has cut the number of non-farm workers on payrolls across America by 818,000, as of March 2024. That cuts the size of the labour force by around 0.5%.

That suggests the US jobs market has been a little less healthy than we thought.

BlackRock’s support for ESG measures hits new low

BlackRock’s support for shareholder proposals on environmental and social issues has fallen to a fraction of its 2021 peak.

In the 12 months to the end of June, BlackRock supported just 20 of the 493 environmental and social proposals put forward by shareholders at annual meetings, or about 4% of the total, according to its annual investment stewardship report.

More here, on the FT.

Higher borrowing makes scrapping two-child benefit cap unaffordable, says minister

The larger-than-expected jump in government borrowing in July means abolishing the unpopular two-child benefit cap is unaffordable, a Treasury minister has said.

Treasury chief secretary Darren Jones appeared to explicitly rule out abolishing the cap at the next Budget, after this morning’s public finances showed the UK ran a deficit of £3.1bn, around £3bn more than forecast by the Office for Budget Responsibility.

Asked about the prospects of abolishing the two-child benefit cap at the Budget on October 30, Mr Jones told the BBC’s World At One programme:

“You have to just look at the economic statistics that we’re talking about today to understand why we just can’t afford to do that right now.”

Jones said abolishing the cap would cost £2bn to £3bn per year, while borrowing for the first four months of the financial year was already £4.7bn more than expected.

Jones said the public expected the Government to get public spending “back under control”, adding:

“That means that we have to make very difficult decisions that in our hearts we wouldn’t want to have to make, and that includes on the two-child cap as well.”

That will disappoint many Labour MPs, who are keen to scrap the limit to fight child poverty.

Last month, seven Labour MPs were suspended after taking part in a rebellion supporting an amendment to scrap the two-child benefit limit.

Updated

Ford makes major changes to its electric vehicle strategy

In the car sector, Ford is shaking up its electric vehicle plans.

The automaker is changing its strategy, with a new focus on lower prices and longer ranges for EV cars, as it aims for a “capital-efficient, profitable electric vehicle business”.

The changes mean it will no longer make a three-row electric sport utility vehicle (SUV), and will take a $400m charge to write down manufacturing equipment. The total cost of the move could be $1.9bn.

Instead, it plans to make hybrid (or ‘electrified’) three-row SUVs, which will burn fossil fuels as well as contain an electric battery. Ford says these will be more efficient and pump out fewer emissions than “pure gas” vehicles, while providing a longer range than pure EVs.

Ford plans to prioritise a new electric “digitally advanced commercial van” in 2026, followed by two new advanced pickup trucks in 2027 and other future affordable vehicles.

It says the EV market is “rapidly evolving” as Chinese competitors expand their market share by using “advantaged cost structures” such as vertical integration, low-cost engineering, and multi-energy advanced battery technology.

China’s BYD overtook Tesla to become the world’s biggest EV maker at the start of this year, having also made major inroads into the European market.

Ford President and CEO Jim Farley says:

We are committed to innovating in America, creating jobs and delivering incredible new electric and hybrid vehicles that make a real difference in CO2 reduction.

We learned a lot as the No. 2 U.S. electric vehicle brand about what customers want and value, and what it takes to match the best in the world with cost-efficient design, and we have built a plan that gives our customers maximum choice and plays to our strengths.

It’s a tale of two retailers in the US today.

Target has lifted its full-year profit forecast, after reporting its first increase in quarterly comparable sales in over a year.

Comparable sales at the discount store chain increased 2.0% in the second quarter of the year, at the high end of its expectations, after it slashed the prices on thousands of products.

Brian Cornell, chair and chief executive officer of Target Corporation, says:

“We made a commitment to get back to growth in the second quarter, and the team delivered, all while expanding operating margins and growing EPS [earnings per share] by more than 40% compared to last year.

Importantly, our growth was driven entirely by traffic in stores and our digital channels, with double-digit growth in our same-day delivery services.

But Macy’s is finding 2024 tougher. The department store chain has cut its full-year sales forecast, and reported a 3.8% decline in net sales in the second quarter.

Macy’s now expects net sales of between $22.1bn and $22.4bn for the financial year, down from a previous forecast of $22.3bn to $22.9bn.

Here’s another handy chart from the UK public finances, showing annual borrowing as a share of the economy over the decades.

The ONS estimates that borrowing in last financial year, to March 2024, was 4.4% of GDP – down from 15.1% in the Covid-hit 2021 financial year.

This morning’s weak public finances haven’t caused any obvious ructions in the City.

The stock market is calm, while the pound is hovering at $1.3030, close to the one-year high touched yesterday.

Bond markets are gently firmer in the UK, with gilt yields a few ticks lower, reports Steve Clayton, head of equity funds at Hargreaves Lansdown, adding:

Investors globally are waiting for Fed Chair Jerome Powell’s Friday speech to the Jackson Hole economic forum.

Whether he will give the markets what they want, which is more clarity on the path of US interest rates, is entirely up to him. But the Jackson Hole speech is one of the Fed’s annual rituals and comes in the run up to the US election. The Fed’s last steer was that maybe a September cut is on the cards, so markets have immediately moved on to guessing how many will follow after that.

Just in: Britain’s competition watchdog has closed its investigation into Apple AppStore and Google Play over suspected anti-competitive conduct.

But, the two tech giants aren’t in the clear.

Instead, the Competition and Markets Authority has decided to consider its concerns under the new digital markets competition regime, once it comes into force.

It is worried that Google and Apple are abusing their market positions to set terms which may be unfair to UK app developers, by forcing them to use the Google Play or AppStore billing systems. This, it fears, could lead to higher prices and reduced choice for app users.

The CMA has also rejected a proposal from Google, which would have given developers an alternative billing option.

The watchdog explains:

Feedback from app developers suggested Google’s proposals to allow app developers to use alternative payment methods for in-app payments did not go far enough and they would in practice remain tied to the Google payment system.

In particular, app developers referred to the level of commission they would still be paying to Google, and to the proposed ‘pop-up screens’ that might put users off completing a transaction.

Danny Sriskandarajah, chief executive of the New Economics Foundation (NEF), says the “monthly panic around public borrowing figures” needs to end.

Borrowing, to invest, is a sensible strategy for a government, Sriskandarajah points out:

“Every month much is made about how much the government is borrowing. But borrowing doesn’t have to be scary - it’s responsible for a government to borrow for investments which will improve our lives and benefit us all in the long run.

“The public are being misled. A strong economy needs investment. You wouldn’t wait until a patient has recovered before you treat them - it’s just as misguided to wait until our economy is thriving before we invest in it. And this investment will more than pay for itself.

“It’s concerning that the chancellor might cut spending in the autumn budget. Decades of cuts have left us struggling to get a doctor’s appointment, educating our kids in crumbling schools, and unable to find a train service that works well. This makes it harder to care for others or do well at work, creating a drag on our economy. More spending cuts will just make the problem worse.

“By sticking to arbitrary borrowing and debt rules, otherwise known as “fiscal rules”, the government risks further undermining living conditions and leaving us unable to meet the future challenges of the climate crisis and an ageing population.”

Analysis: Reeves can point to ONS public finances report as cover for a harsh budget

If Rachel Reeves was looking for political cover for what is being billed as a budget of eye-watering severity, then the latest set of figures for the UK’s public finances certainly provided it, our economics editor, Larry Elliott, writes:

The chancellor has been saying since arriving at the Treasury last month that the government has been spending and borrowing a lot more than expected – and the Office for National Statistics (ONS) has duly obliged with evidence to back up her case.

For a start, borrowing in July alone and in the first four months of the 2024-25 financial year has come in higher than the independent Office for Budget Responsibility (OBR) was expecting at the time of Jeremy Hunt’s March budget. The July figure of £3.1bn was £3bn higher than the OBR’s forecast, while the cumulative deficit was £4.7bn higher.

Here’s Larry’s analysis of today’s public finances:

Social housing rents to rise as part of UK push for affordable housebuilding

Social housing rents will rise by more than inflation over the next decade as part of UK government plans to boost affordable housebuilding and shore up the finances of struggling landlords.

The chancellor, Rachel Reeves, is working on plans to introduce a 10-year formula to calculate social rent homes that will result in rents increasing every year by the rate of the consumer prices index – which is now 2.2% – plus 1%, removing an existing cap on rises.

Reeves is expected to announce the plan at her first budget, on 30 October, alongside measures to raise taxes and cut spending.

The plan for social rent homes – those rented usually at 50% of market rate – will be welcomed by the councils and housing associations who are now facing a squeeze on their finances, which has put the brakes on housebuilding.

More here:

The Office for Budget Responsibility has confirmed that UK government borrowing is running ahead of its forecasts from March, by £4.7bn so far this financial year.

Reacting to this morning’s public finances, the OBR says:

The difference with our forecast profile is driven primarily by higher-than-forecast consumption spending by government departments (£5.8 billion), which appears related to strong growth in public sector pay. Receipts are broadly in line with profile in the year to date. Data on central government spending remain highly provisional at this time of year.

Nevertheless, they indicate that departmental spending for 2024-25 could significantly exceed the March 2024 forecast. Due to this risk, on 29 July the OBR initiated a review of the preparation of our March forecast for departmental spending, which will conclude in advance of our next forecast which is on 30 October.

There are several levers Rachel Reeves could pull in the October budget, to patch up the public finances.

My colleagues Larry Elliott and Peter Walker reported last night that the changes Reeves is believed to be considering include:

  • Raising more money from inheritance tax and capital gains tax.

  • Sticking to plans for a 1% increase in public spending even though it would involve cuts for some Whitehall departments.

  • Rejecting pressure to scrap the two-child benefit cap.

  • Changing the way debt is measured to exclude the Bank of England.

China opens anti-subsidy probe into European dairy imports

Trade tensions between China and Europe continue to escalate.

Beijing has announced a probe into EU subsidies of some dairy products imported into China, covering various types of cheeses, milks and creams intended for human consumption.

China’s Ministry of Commerce says:

“The Ministry of Commerce has decided to initiate an anti-subsidy investigation on imported relevant dairy products originating in the European Union from August 21, 2024.”

The move comes a day after the EU announced five-year import duties of up to 36% on Chinese electric cars.

The move appears to be mainly aimed at Ireland, Reuters reports, adding:

China will examine 20 subsidy schemes from across the 27-strong bloc, specifically those from Austria, Belgium, Croatia, Czech Republic, Finland, Italy, Ireland, and Romania, it said in a statement.

Of the countries listed, Ireland is by far the biggest exporter of dairy products to China, having sold $461 million worth of goods to the Asian nation last year.

McDonald’s to create 24,000 jobs in the UK and Ireland

Away from the public finances, fast food chain McDonald’s has announced it will invest £1bn in the UK and Ireland over the next four years.

It plans to open more than 200 new restaurants, which it says will create more than 24,000 new jobs.

Alistair Macrow, CEO, McDonald’s UK&I, says the company is committed to investing in new opportunities and supporting growth across the UK, where it opened its first outlet in London in 1974.

Macrow adds:

We have come a long way since we first opened our doors in Woolwich 50 years ago.

We have become an important part of communities across the UK, and I’m delighted that in this milestone year we are able to demonstrate our ongoing commitment to growth, and announce the creation of new jobs across the country as we plan to open over 200 new restaurants over the next four years.

Resolution Foundation: Reeves faces challenge from deteriorating public finances

July’s public finances show the government faces a “challenging fiscal picture” in the near term, warns Cara Pacitti, senior economist at the Resolution Foundation.

Pacitti explains that spending pressures suggest the public sector finances are worse than when the OBR produced their March 2024 forecast.

Pacitti explains:

“With borrowing £3 billion higher-than-expected in July, the deteriorating state of the public finances illustrate the challenges that Rachel Reeves will face ahead of her first Budget this Autumn.

“The fiscal inheritance facing the Chancellor is one of rising taxes, increasing spending challenges, and very little wriggle room in the event of bad economic news. This combines to create a challenging backdrop for the new Government to realise its ambitions of boosting growth while putting the public finances on a sustainable path.”

Investec: Expect tax rises in the budget

Today’s public sector numbers confirm that fiscal progress remains disappointing so far this year and strengthen the view that the government will be forced into some tax rises at the 30 October Budget.

So says Philip Shaw, economist at City firm Investec.

He told clients this morning:

We are currently only a third of the way through the financial year and it is early to be drawing concrete conclusions about the medium-term path of the public finances. However as things stand, the relatively poor trend in borrowing indicates that the fiscal headroom from the previous government’s fiscal mandate (£8.9bn) could be completely eliminated.

This is especially the case when one bears in mind the relatively generous public sector pay settlements sanctioned by the current government and that as things stand, non-protected government departments would be faced with a decline in their budgets in real terms over the medium-term. It is possible that Chancellor Rachel Reeves loosens the rules a little, but this would risk undermining her fiscal credibility.

Inheritance tax take is rising

Inheritance tax has brought in an extra £200m so far this year, new figures from HMRC show.

Inheritance Tax receipts for April to July 2024 were £2.8bn, up from £2.6bn in the same period last year.

HMRC says the increase is due to increased asset values pushing up the value of estates, and the previous government’s decision to freeze IHT thresholds.

Rachael Griffin, tax and financial planning expert at Quilter, says the increase will “rekindle debates” about whether this tax will be increased as the government attempts to shore up the public finances.

Griffin explains:

Speculation is rife that the Chancellor might introduce changes to IHT, particularly targeting Agricultural Property Relief (APR) and Business Property Relief (BPR).

These reliefs, which currently allow farms and family businesses to be passed down without incurring prohibitive tax liabilities, might be scaled back. Labour might opt to remove APR for those who do not actually own farmland and BPR where it doesn’t meet the intention of the relief i.e. protecting small businesses being kept ‘in the family’.

However, the unintended consequences could be huge especially for the AIM market which relies heavily on the shares being eligible for BPR after holding the shares for two years. This might therefore hamper Labour’s stated aim of getting more investment into UK plc.

National debt now 99.4% of GDP

The big picture remains that the UK’s national debt is the highest since the early 1960s, as a share of the economy.

Public sector net debt excluding public sector banks is now estimated to be 99.4% of gross domestic product (GDP), at around £2.74 trillion.

That’s an increase of 3.8 percentage points since July 2023.

Rob Wood, chief UK economist at Pantheon Macroeconomics, says:

“We expect ... Reeves to borrow around 20 billion pounds per year more than planned in the March Budget for the next five years as well as funding medium-term spending with higher taxes.”

IFS: Reeves faces 'tough choices' in the budget

Today’s public finances show that the UK’s decent-looking growth rate this year does not mean that everything is rosy in the economy.

Isabel Stockton, senior research economist at the Institute for Fiscal Studies, explains:

Tax revenues - despite economic growth in the first quarter of the financial year surpassing some of the more pessimistic expectations - are running close to forecast or, if anything, slightly behind. This, combined with higher spending, leaves borrowing higher than forecast.

Stockton adds:

All of these data are preliminary and we should be cautious of over-interpreting them. But the early signs are that better-than-expected growth figures won’t be enough save Rachel Reeves from tough choices in her first Budget on 30 October.

The combination of in-year spending pressures identified at last month’s spending audit and the ongoing, and well known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise.”

Capital Economics predicts Reeves will raise taxes and increase borrowing

July’s public finances figures continued the recent run of bad news on the fiscal position, says Alex Kerr, UK economist at Capital Economics.

Kerr reckons that public borrowing is track to overshoot the OBR’s 2024/25 forecast of £87.2bn by £4.7bn.

Even if this overshoot does not persist, Capital Economics expect the Chancellor to raise taxes and increase borrowing at the Budget on 30th October.

Kerr explains:

Overall, today’s release highlights the tight fiscal backdrop that the Chancellor faces ahead of her first Budget on 30th October. We still think that she will look to raise an additional £10bn a year via higher taxes in the Budget and increase borrowing by around £7bn a year.

Updated

The increase in borrowing in July leaves Rachel Reeves with “little headroom” ahead of October’s budget, warns Dennis Tatarkov, senior economist at KPMG UK.

“Borrowing in July was ahead of OBR forecasts and could rise further if the announced overspend makes its way into the revised figures. This could take borrowing for the 2023-24 fiscal year to over £90bn if significant savings cannot be found.

“Strong GDP growth in the first half of the year has helped bring higher than expected revenues, which in July were £99.4bn and ahead of projections made during the March Budget. However, an expected slowing in GDP growth ahead could limit revenues in the second half of the year.

“We estimate the headroom that the Chancellor has to meet current fiscal rules has shrunk further, down to £6bn from £9bn in March. This may mean that the targets themselves could see a tweak in the upcoming Autumn Budget.”

UK spent £7bn on debt interest in July

Britain spent £7bn paying interest on the national debt in July.

That’s the second highest interest payable in any July since records began in 1997, the ONS says.

That’s lower than the £8bn interest bill in July 2023, though, as falling inflation lowered the debt bill on index-linked bonds.

Updated

Government expenditure jumped by £3.5bn year-on-year in July – more than cancelling out the increase in tax – to £107.4bn.

This was primarily due to a £2.7bn increase in benefits, linked to inflation.

There was also a £1.3bn rise in central government departmental spending, as inflation and pay rises increased running costs.

National insurance cut hits tax take

Digging into July’s public finances, we can see that higher tax receipts lifted central government’s income to £91.0bn in July – £1.7bn more than in July 2023.

Tax receipts increased by £2.1bn to £71.2bn, including a £1.7bn increase in income tax receipts, £300m more in corporation tax, and £200m of VAT.

But, there was a £1.1bn drop in “compulsory social contributions”, to £13.8bn, due to the reductions in the main rates of National Insurance made by former chancellor Jeremy Hunt.

Self-assessment tax receipts rose by £1.1bn year-on-year to £12.9bn. However, that’s £700m less than the OBR had forecast (one reason the deficit was much higher than the £100m expected by the fiscal watchdog).

Updated

Darren Jones: We've been left with a dire inheritance

The jump in UK government borrowing last month shows the “dire inheritance” left by the previous government, says chief Secretary to the Treasury Darren Jones:

“Today’s figures are yet more proof of the dire inheritance left to us by the previous government.

“A £22 billion black hole in the public finances this year, a decade of economic stagnation and public debt at its highest level since the 1960s, with taxpayers’ money being wasted on debt interest payments rather than on our public services.

“We are taking the tough decisions that are needed to fix the foundations of our economy, modernise our public services and rebuild Britain so we can put more money back into people’s pockets across the country.”

Updated

Introduction: UK borrowing hits £3.1bn in July

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The health, or unsoundness, of Britain’s public finances is a key issue for Westminster and the City of London, with a painful autumn budget looming.

And the latest public finances data, just released, shows that the UK borrowed more than twice as much as economists expected last month to balance the books.

Public borrowing hit £3.1bn in July, which is £1.8bn more than in July 2023. It’s the highest July borrowing since 2021 (when the Covid-19 pandemic drove up spending and hit tax revenues).

City economists had expected lower borrowing, of £1.5bn.

Crucially, the fiscal watchdog, the Office for Budget Responsibility, had estimated the UK would only need to borrow £100m in July – which is typically a strong month for tax receipts, such as income tax self-assessment returns.

So, the black hole in the public finances which chancellor Rachel Reeves warned of in July has just got deeper.

Although the tax take increased in July, this was more than wiped out by higher government spending.

ONS deputy director for public sector finances, Jessica Barnaby, explains:

“July borrowing was almost £2 billion higher this year than in 2023. Revenue was up on last year, with income tax receipts in particular growing strongly. However, this was more than offset by a rise in central government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.”

The ONS has also revised some of its earlier public finances data, which has reduced its estimate of borrowing since April by £1.5bn,. It now estimates the UK has borrowed £51.4bn so far this financial year.

That’s £500m less than was borrowed in the same four months last year, but £4.7bn more than the £46.6 billion forecast by the OBR for this period.

This increase in borrowing intensifies the pressure on Rachel Reeves to make tough decisions in her first fiscal event, this autumn.

As the Guardian reported last night, the chancellor is planning to raise taxes, cut spending and get tough on benefits in October’s budget as she tries to fill a substantial black hole in the public finances – despite stronger than expected growth in the first half of 2024.

Reaction to follow….

The agenda

  • 7am BST: UK public finances for July

  • 9am BST: South Africa’s inflation report for July

  • Noon BST: US weekly mortgagea approvals data

  • 3.30pm: EIA to release US crude oil inventory data

  • 7pm: Minutes of July’s Federal Reserve interest-rate setting meeting released

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