UK Borrowing Surge Intensifies Pressure on Chancellor Rachel Reeves

21 June 2025

Rachel Reeves at the Labor Party Conference (PA) (PA Wire)

UK government borrowing hit £17.7 billion in May, marking the second‑highest level recorded for that month and intensifying scrutiny on Chancellor Rachel Reeves’s fiscal strategy. Despite a 9.5 percent rise in tax revenues, bolstered by higher income tax and a national insurance uplift in April, the deficit exceeded forecasts set by the independent Office for Budget Responsibility (OBR), dramatically eroding Reeves’s £9.9 billion fiscal buffer.

These figures underscore the tension central to Reeves’s economic paradigm: although public finances must be balanced by 2029‑30, generous commitments to public sector pay and welfare have sharply increased month‑on‑month borrowing. With interest payments on national debt surpassing £100 billion annually, analysts warn that maintaining fiscal discipline could necessitate £10 - £23 billion in tax hikes or spending cuts in the Autumn Budget.

Capital Economics factors tipping toward the upper end of that range, arguing that Reeves’s fiscal headroom may already be exhausted. Reversals to planned winter fuel allowance cuts and downward revisions to growth forecasts have further narrowed options. Absent fresh austerity measures or tax increases, her stated fiscal goals may be unattainable.

This pressure unleashed criticism of the government’s policy coherence. Shadow finance spokespersons accuse Labor of irresponsible spending, warning that looming tax rises would burden households and dampen economic recovery. Additionally, concerns have surfaced over policy missteps, particularly the contentious reforms to National Insurance and non‑domestic tax status, which have prompted backlash from businesses and high-net-worth individuals and could prompt further reversals.

Compounding these domestic pressures are broader economic headwinds. Retail sales dropped 2.7 percent in May, the steepest decline in 18 months, hinting at weakening consumer spending. Meanwhile, insolvencies in England and Wales rose 15 percent year‑over‑year, pointing to stress in the business sector. Inflation‑linked welfare outlays continue climbing, pushed upward by an ageing population and index‑linked payments.

But the International Monetary Fund may offer Reeves a reprieve. A recent IMF review endorsed the credibility of her “securonomics” approach while suggesting fiscal rules could be made more flexible such as switching to an annual OBR forecast model to reduce mandatory policy reactions to minor slippage. The IMF emphasized that Reeves’ ambitious investment in infrastructure and public services is growth‑oriented, albeit requiring cautious expenditure management amid rising macroeconomic uncertainty.

This global endorsement gives Reeves political cover to resist calls for sharp tax hikes or cuts at least for now but she still faces an inevitable fiscal reckoning. The Autumn Budget will be pivotal: the Chancellor must choose between raising revenue or tightening the spending belt, all while preserving economic momentum .

The stakes are high, balancing credibility, growth, and social investment is no easy feat. Reeves’s choices next month may define Labor's economic reputation for years. As borrowing remains stubbornly elevated and growth fatigues, the Chancellor must decide whether to accept higher taxes, deepen spending cuts, or risk breaching her own fiscal rules.

This borrowing spike on June 21 serves as a warning light: the government’s fiscal journey has entered a more treacherous phase. With reduced headroom and unyielding economic pressures, Reeves’s leadership will be judged not by her early vision, but by her execution of hard choices this autumn.