Weak growth and rising costs push public finances to breaking point

The UK posted a £12.6bn deficit in March — a figure that, while broadly in line with what was expected, delivers a stark warning to the Government: tax revenues are not keeping up with public expenditure, and forecasts for growth suggest that this isn’t changing any time soon.

Total borrowing for the financial year now stands at over £135 billion, threatening the sustainability of the Chancellor’s fiscal rules.

The reality is that economic growth remains too weak to ease the pressure.

The economy received a welcome boost in February, registering 0.5% month-on-month growth, but this followed a period of minimal growth and is before the impacts of the conflict in the Middle East filter into the economy.

The tax base is stagnating, as inadequate growth leaves government revenues lagging dangerously.

Meanwhile, spending pressures are not waiting. Health costs continue to rise and pensions are increasing year-on-year. Debt interest remains a heavy burden, only worsened by the rise in UK gilts since the beginning of March. These are not temporary issues — they are structural. The idea that borrowing will fall steadily in the coming years looks increasingly optimistic unless the economic backdrop improves materially.

Fixing the UK’s growth prospects requires long-term reform, but that won’t bring overnight results. If the Chancellor wants to maintain fiscal stability, she will have to make decisions that affect the Government’s finances in the immediate term.

Households are already feeling the squeeze, and ongoing tensions in the Middle East will lead to elevated energy costs. As we enter the colder months later this year, the Government will have to decide whether they can afford to provide financial support — and who to.

This is one of many tough decisions that the Chancellor will have to make on spending if growth does not pick up. The other option is another set of tax rises — an unpopular move that would serve to subdue growth even further.

It is clear that the next phase will demand choices, none of which will be easy.