Brits are facing a miserable winter amid a barrage of bleak economic news – just a week before the Budget.
Official figures showed the UK’s debt mountain has hit the grim milestone of £3trillion, after public sector borrowing came in higher than expected again last month at £24.5billion.
Meanwhile, the fallout from the Middle East crisis saw inflation surge above predictions to reach 3.5 per cent in the year to September.
Analysts said the price pressure is likely to guarantee that the Bank of England will increase interest rates next month, heaping pain on mortgage-payers. Some are now anticipating another rise in December.
The dire backdrop was underlined as Chancellor John Healey prepares to deliver his first fiscal package next Wednesday – with fears running high of another tax raid to balance the books.
The dire backdrop was underlined as Chancellor John Healey prepares to deliver his first fiscal package next Wednesday
Mr Healey moved to rule out pushing up capital gains tax yesterday, in a bid to cool nerves on markets.
However, speculation is mounting that he will opt to hit banks as he tries to find cash for Andy Burnham‘s policy pledges.
Economists have suggested that Mr Healey could be helped by a windfall from higher inflation, which will drag people deeper into the tax system due to thresholds being frozen until 2031.
While that would help offset high debt interest costs, it will also leave families worse off and put intense strain on public services unless departmental funding also rises.
The batch of economic figures were released at 7am, just as the Government announced its long-awaited decision to approve the Jackdaw gas field scheme in the North Sea.
Mr Healey responded by suggesting he wants to give people ‘a bit of breathing space on the costs of living’ in the Budget.
Speaking at the St Fergus gas terminal near Peterhead, the Chancellor said: ‘People can see prices rising. They see it at the pumps. They see it in their bills.
‘They see it with monthly mortgage costs, and they can see it’s driven by the conflict in the Middle East.’
He said the UK is not alone in this, adding ‘every country around the world is suffering from the impact of the Iran war and trade barriers and restrictions that mean that energy flows aren’t getting out’.
He continued: ‘We’re a week away from the Budget, and I think if people look at what we did in the first week of the Government – £2 cap on bus fares, we cut VAT off electricity bills, we reduce business rates for pubs, clubs, and venues.
‘And I will look to do more, as I can, to give a bit of breathing space on the costs of living and the costs of business at the Budget.’
The Office for National Statistics (ONS) reported that public sector net borrowing increased by £1.8billion compared with the same month last year.
It was also £1.9billion ahead of Office for Budget Responsibility (OBR) forecasts, and above the £24.1billion widely predicted by economists.
The UK Government spent £24.5billion more than it brought in through taxes and other measures during the month.
Total Government spending rose by 5.6 per cent to £111.3billion in September, compared with a year earlier.
The rise came on the back of higher debt interest payments, linked to the increase in global borrowing costs largely linked to the conflict in the Middle East.
Central government debt interest costs were £10.9billion for September, up £1.6 billion against the same month last year, and marking the largest September figure on record.
Meanwhile, net spending on social benefits rose by £1.6billion to £30.6 billion for the month.
The data also showed that public sector net debt surpassed £3trillion for the first time, up £91.7billion compared with a year earlier.
However, debt as a proportion to GDP decreased by 0.7 percentage points to 94 per cent.
ONS chief economist Grant Fitzner said: ‘Borrowing in the first six months of the current financial year remained below the same period last year, thanks to higher receipts, although it was still above the official forecast.
‘Preliminary figures suggest that although debt in cash terms continues to rise, as a proportion of GDP it has fallen over the year.
‘On this latter basis it remains at levels last seen in the early 1960s.’
It came as separate data from the ONS showed that UK inflation lifted to an 11-month-high of 3.5 per cent last month, partly driven by rising fuel costs linked to the Iran war.
Mr Healey said: ‘We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide.
‘Last week the IMF said our UK fiscal discipline stands out with the lowest forecast deficit in the G7 by 2029.
And today we’ve given the green light to getting North Sea gas from the Jackdaw field, investing the revenues in our clean energy future and supporting British workers.
‘In my Budget next week, I will keep up this momentum. Maintaining our fiscal discipline and drive for growth in every postcode, while giving businesses and families some breathing space.’
Shadow chancellor Andrew Griffith said: ‘Government borrowing of more than £3trillion – the highest in history – and rising inflation show Labour has lost control of the economy.
‘Next week’s Budget needs to take urgent action to tackle the deficit, and reduce the red tape and net zero costs that are driving up the cost of living for families.
‘The Conservatives will always be honest about the state of our nation’s finances. We will cut the welfare bill and cut wasteful spending so we can cut taxes and make our country prosperous again.’
Nigel Green, chief executive of financial advisory firm deVere Group, said: ‘I’d now expect a hike in November and another in December.
‘Inflation’s heading the wrong way, it’s spreading into services, and the Bank knows it was too slow last time.
‘Having raised rates twice, it’s hardly going to turn around and cut them a few months later. Unless the economy weakens badly, cuts next spring look very unlikely to me.’
Greg Thwaites, interim chief economist at the Resolution Foundation, said: ‘Rising inflation and record levels of debt illustrate the double dilemma facing the Chancellor – how to ease cost of living pressures for families while keeping a lid on Government borrowing.
‘Borrowing is already off track this year, debt has hit £3trillion, and markets are closely scrutinising government’s ability to keep on top of the public finances.
‘The Chancellor must confront this double dilemma head on in his Budget next week rather than duck reality.’
Matt Swannell, chief economic adviser to the Item Club, said: ‘The public finances remain in a fragile position, and next week’s Budget looks set to be a relatively low-key affair.
‘Higher gilt yields have dented the Chancellor’s fiscal headroom, likely leaving between £10 billion and £15 billion of margin for error against his primary fiscal rule.
‘With little room for manoeuvre, any giveaways are likely to be modest and temporary.’
Darwin Friend, research director at the TaxPayers’ Alliance, said: ‘Passing the grim milestone of £3trillion in national debt is a damning indictment of decades of fiscal failure.
‘With debt interest soaring and borrowing overshooting forecasts yet again, taxpayers are paying a terrifying price for Whitehall’s addiction to spending.
‘Instead of hiking taxes, the chancellor must use his first budget to get a grip on the public finances by making immediate cuts to Britain’s ballooning welfare bill.’
