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The UK government suffered a double economic blow on Wednesday as annual public borrowing came in almost £15bn more than expected and private sector activity contracted at the fastest pace in more than two years.
The borrowing figures put pressure on chancellor Rachel Reeves to raise taxes in her autumn Budget to balance the books just as Wednesday’s PMI data, a measure of the health of the private sector, showed that businesses are struggling.
The shortfall between government income and spending was £151.9bn in the 12 months to March, the Office for National Statistics said, an overshoot of more than 10 per cent on the £137.3bn forecast just a month ago by the Office for Budget Responsibility, the government’s fiscal watchdog.
It was also £20.7bn more than in the same 12-month period a year earlier and the third-highest level of borrowing on record for a full fiscal year.
“This raises the chances that if the chancellor wishes to stick to her fiscal rules, more tax hikes in the autumn Budget will be required,” said Ruth Gregory at the consultancy Capital Economics.
Meanwhile, the S&P Global flash UK PMI composite output index fell to a 29-month low of 48.2 in April from 51.5 the previous month, according to new data published on Wednesday.
This was lower than the 50.4 forecast by economists polled by Reuters and below the 50 threshold, indicating a contraction.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “While recent months have been characterised by UK businesses treading water, broadly stagnating since last autumn’s Budget, businesses are reporting more of a struggle to keep their heads above water in April.”
Reeves, who increased taxes paid by employers in last autumn’s Budget, has a self-imposed rule that day-to-day spending must be covered by revenues by 2029-30.
Public sector borrowing for the month of March was £16.4bn, marginally above the £16bn expected.
But Wednesday’s figures also showed that the UK’s current budget deficit, which reflects borrowing to fund day-to-day public sector activities, was £74.6bn for the last fiscal year, £13.9bn higher than the OBR forecast last month ago.
ONS chief economist Grant Fitzner said the rise in public sector borrowing appeared to be “largely due to inflation-related costs, including higher pay and benefit increases” and had come despite a “substantial” boost in income.
The UK’s borrowing costs and deteriorating economic prospects have put further pressure on the country’s public finances. The OBR warned last month that, despite recent welfare cuts, the government’s “fiscal headroom” — or budgetary room for manoeuvre — remained historically small at £9.9bn.
US President Donald Trump’s tariffs also target Britain, along with many other countries, with 10 per cent across-the-board duties and higher levels on steel and cars.
Mel Stride, shadow chancellor, accused Reeves of “fiddling the fiscal rules” and increasing borrowing by £30bn a year.
‘’These eye-watering sums are being paid for by hardworking people through higher taxes, higher prices and higher mortgage rates.’’
Darren Jones, chief secretary to the Treasury, said the government was “going through every penny of taxpayer money spent, line by line, for the first time in 17 years to tear out waste”.
The figures come as Reeves is due to attend the annual meetings of the IMF and World Bank in Washington.
On Tuesday, the IMF cut its 2025 growth forecast for the UK to 1.1 per cent, down from its previous estimate of 1.6 per cent, warning of widespread economic disruption from trade tensions.
The ONS said that public sector spending in the 12 months to March had risen £56.8bn from the previous fiscal year, with higher spending on public services, benefits and debt.
Interest payable on central government debt increased by £2.1bn to £85bn, largely because the interest payable on index-linked gilts rises and falls with the Retail Price Index.
Public sector receipts were up by £36bn, with growth in central government tax receipts partially offset by reductions in national insurance contributions.
The UK’s Debt Management Office said on Wednesday that it planned to increase its debt sales for 2025-26 by £5bn, compared with what it laid out in Reeves’ Spring Statement, taking the total net financing requirement to £309bn.
After a surge in long-term borrowing costs, and calls for the DMO to scale back its long-term debt issuance, it said it would fund the extra through an increase to short-term Treasury bills, and also reduced the proportion of long-term gilts that it plans to sell.
Long-term debt rallied, pushing the 30-year UK gilt yield — which hit its highest since 1998 earlier this month — down 0.09 percentage points to 5.27 per cent.
Additional reporting by George Parker and Ian Smith in London