Rachel Reeves warned the economy could enter a “doomed loop” after borrowing surged to a new high in a fresh blow to the Chancellor.
The Treasury borrowed £17.8 billion in December, the highest level for four years and £10 billion more than the same month last year.
It follows turmoil in financial markets which sent public sector borrowing costs soaring and raised fears the Chancellor will be forced to announce swingeing cuts to public services when she announces spending plans in June.
But a combination of rising debt and lower spending would devastate the economy according to Andy Haldane, former Chief Economist with the Bank of England. He said: “Then I think you are really into a doomed loop between debt and growth. And that's a situation to avoid at all costs.”
Mr Haldane told Politics Hub wth Sophy Ridge on Sky News: “It would be deeply counterproductive to both growth and to the fiscal position, if that led to a cutting back on investment and indeed in spending more generally.”
Business leaders have accused Ms Reeves of threatening growth by increasing National Insurance in her Budget last year, with the British Chambers of Commerce warning that firms “are struggling to deal with a raft of extra costs”, but Ms Reeves came out fighting when she spoke. at the World Economic Forum in Davos. The Chancellor said: “My instinct is to have lower taxes, less regulation, make it easier for businesses to do business.
“But unless you can have that economic and fiscal stability, then, to be honest, I think that you're not going to have any serious plan for economic growth.”
Ms Reeves said taxes could come down in the future but only once the economy was growing. She said: “If we can run the state better, we can run public services better, we can bring investment into the UK and grow the economy, we don't have to keep ratcheting up taxes to make the sums add up.”
The Chancellor is expected to deliver a speech next week setting out her plan to grow the economy in a bid to improve business confidence but the key dates are March 26, when Treasury watchdog the Office for Budget Responsibility delivers its verdict on the state of the public finances, and June 11, when the Chancellor publishes a spending review with multi-year plans for government departments.
Tories urged the Chancellor to “get a grip”. Shadow Chancellor Mel Stride said: “Labour are already losing control of the finances.
“Figures out today show borrowing is higher than forecast. So far this financial year it has been almost the highest since records began, second only to the pandemic.”
A senior Conservative MP accused Sir Keir Starmer of taking the country back to the 1970s, when inflation soared and the UK's poor economic performance saw it dubbed the “sick man of Europe.” Sir Bernard Jenkin told the Prime Minister: “When it comes to his budget, which raised taxes, raised borrowing and raised public spending as a strategy for economic growth, when is the Prime Minister going to accept the words of the Labor prime minister in the 1970s, who explained to a Labor conference that 'in all candour, that option no longer exists'?”
The Treasury has ordered departments to find efficiency savings of 5% but it is feared that the rising cost of borrowing could mean cuts go even deeper. Ms Reeves has said she is determined to get borrowing down and also to avoid further tax hikes, suggesting cuts may be the only option left in order to balance the books.
Darren Jones, who as Chief Secretary to the Treasury acts as Ms Reeves's deputy, said that public spending is “long overdue a reckoning” and warned the Government cannot “keep spending more and more money”.
In a speech earlier this week he said: “As a moderniser with an optimism about the future for Britain, I just do not accept the idea that we should just keep spending more and more money for continued poor outcomes.”
Borrowing in the financial year so far is £129.9 billion, £8.9 billion more than the same period a year earlier and a record outside of the mammoth borrowing seen at the height of the pandemic in 2020.
Year-to-date borrowing is also about £4 billion more than the £125.9 billion forecast by the Office for Budget Responsibility.