Britain's national debt is on the verge of reaching £3 trillion, with July's borrowing significantly exceeding expectations, according to figures from the Office for National Statistics and commentary by Maggie Pagano. The government borrowed £1.8 billion in July, an increase of £700 million compared to the same period last year. This rise in borrowing occurred despite an increased tax revenue, attributed to a £2 billion increase in welfare benefit spending over the past year, bringing the monthly welfare bill to nearly £30 billion.
So far in the current financial year, the government has borrowed £56.7 billion, surpassing the Office for Budget Responsibility's forecast of £54.4 billion. This brings the national debt to £2.99 trillion, representing 94 percent of GDP, an increase of approximately £96 billion from the previous year. A particularly concerning figure is the £7.7 billion spent on interest payments in July alone, a nearly 10 percent increase from the prior year.
The bond markets have reacted negatively to these economic indicators. The yield on ten-year UK gilts has risen to over 5 percent, nearing a 20-year high, while the yield on 30-year gilts is hovering around 5.8 percent. Investors perceive that Chancellor John Healey is not only close to exceeding fiscal rules but also losing control of spending. His available financial headroom has reportedly decreased from £24 billion at the Spring Statement to around £8 billion.
Looking ahead to his first budget on October 28, a potential strategy being discussed involves approximately £25 billion in tax increases, which could disproportionately affect businesses and investments. However, raising taxes again during a period of economic weakness is described as "utter insanity" by Pagano, drawing parallels to past economic downturns and the negative impacts on growth. Economists, including Andy Haldane of the British Chambers of Commerce, argue that further tax hikes could stifle economic growth. Reports indicate a 9 percent rise in the number of companies facing insolvency, reaching 53,756 over the past year. Housebuilding and construction are down, inflation is up, and business confidence remains stagnant.
A report from the Institute of Economic Affairs highlights the UK's tax system as a significant threat to enterprise. The report suggests that raising taxes on investment during economic downturns, such as after the 2008 financial crash and the pandemic, were significant errors with severe consequences for growth. Pagano advocates for boldness from the Chancellor, suggesting he consider welfare reform, even if it means challenging his own party's backbenchers, or potentially seeking a public mandate if other measures are insufficient.