Government borrowing surges in May to fund Labour’s spending
Government borrowing in May surged to £17.7bn, official data has shown, reflecting the government’s need for cash to fund Labour’s spending splurge.
This represented the second-highest May borrowing figure since records began more than 30 years ago and higher than the Office for Budget Responsibility (OBR) forecast.
Fresh data published by the Office for National Statistics has revealed that the failure to close the deficit in day-to-day spending has led to national debt rising by 0.5 percentage points compared to last year.
The government also took an extra £10bn from taxpayers in May compared to a year ago, representing the effect higher taxes have had in adding cash to government coffers.
The latest set of figures are likely to put greater stress on public finances, with more borrowing leading to a deterioration in public debt.
Darren Jones, chief secretary to the Treasury, said the government were making changes to make Britons “better off”.
“Since taking office, we have taken the right decisions to protect working people, begin repairing the NHS, and fix the foundations to rebuild Britain,” he said.
“We stabilised the economy and the public finances; now we need to ensure that the British economy delivers for working people.”
Reeves is poised to raise taxes later this year, according to several City analysts, after the Spending Review locked in commitments to funding various government departments.
Deutsche Bank suggested Reeves may have to find an extra £10bn to fund her spending splurge on the NHS and schools while KPMG believe she could be forced into finding an extra £20bn from the taxpayer.
Capital Economics’ Alex Kerr suggested tax hikes would come as a result of recent policy decisions.
“The u-turns on benefit and welfare spending, downward revisions to the OBR’s productivity forecasts and higher borrowing costs may mean, to maintain her current £9.9bn buffer, Reeves has to raise between £13bn and £23bn later this year.”
Banks and investors could be targeted in the autumn, with the abolition of a £500 allowance on dividends reportedly on the table.
Analysts at wealth management firm St James’ Place said this week a move to raise the highest rate of tax on dividends could backfire and yield less revenue.
UK Finance chief executive David Postings separately warned banks would become less competitive than competitors in Germany and France, threatening the reputation of London as a financial hub.
Rachael Griffin, a tax expert at Quilter, said an uptick in tax receipts showed the tax burden was already rising due to the effects of fiscal drag, otherwise known as a “stealth tax”.
“HMRC’s latest figures for May 2025 mark another chapter in the government’s stealth-tax strategy,” Griffin said.
“Despite no new headline tax rises [in May], receipts continue to climb thanks to frozen thresholds and slashed allowances.
“With income tax thresholds still frozen, many workers are paying a larger share of their earnings in tax simply due to modest pay rises, even when those increases fail to match inflation.”
Borrowing risks from fiscal rule changes
Analysts have warned the Treasury risk damaging its growth ambitions as rule changes imposed on non-domiciled residents have led to an exodus of wealthy investors.
The Centre for Economic and Business Research recently warned the government could see a shortfall of £8bn due to scrapping the non-dom status.
Separate research by the Adam Smith Institute found the government’s decision to end tax exemptions on wealthy foreign investors would cost the UK economy up to £111bn in the next ten years.
The other option for the Chancellor at this year’s Autumn Budget is an adjustment of her fiscal rules, an action which has been recommended by researchers at the Paris-based OECD.
But a decision to do so would likely lead to more borrowing and risk inflating high debt interest payments, with the government already spending double the amount on the cost of borrowing as it currently does on defence.