UK's Reeves under pressure after new jump in government borrowing

By Suban Abdulla and William Schomberg

LONDON (Reuters) -Britain borrowed a lot more than expected last month, according to official figures that showed the scale of the challenge facing finance minister Rachel Reeves, who is expected to announce cuts to her spending plans next week.

Public sector net borrowing stood at 10.7 billion pounds ($13.84 billion) in February, the Office for National Statistics said on Friday, much higher than a median forecast of a 6.6-billion-pound deficit in a Reuters poll of economists.

Reeves is likely to announce belt-tightening to get back on track to meet her fiscal rules next Wednesday when she delivers a half-yearly budget update speech alongside fresh economic and public finance forecasts from Britain's fiscal watchdog.

The ONS said Britain's government borrowed 132.2 billion pounds over the first 11 months of the 2024/25 financial year, far higher than the watchdog's forecast for a shortfall of 111.8 billion pounds.

It was the third-highest borrowing for the equivalent period since records started in 1993, surpassed only during the COVID-19 pandemic and after the 2008 global financial crash.

Capital Economics said day-to-day spending was due to go 15 billion pounds further into the red than forecast by the Office for Budget Responsibility in the current financial year, "underlining just how difficult the choices (Reeves) faces over the next few years will be".

Pantheon Macroeconomics said the state of the public finances and the need for further increases in defence spending meant Reeves was likely to raise taxes again in a full budget statement later this year.

"Taxes and borrowing will both need to rise in October to fund this generational challenge," Pantheon economist Elliott Jordan-Doak said.

Reeves last year announced a rule to bring day-to-day spending into balance with tax revenues by the end of the decade.

The OBR's forecasts made last October gave her a small margin of just under 10 billion pounds to hit that target. But slower-than-expected economic growth and higher borrowing costs are estimated to have used up all of that margin.

The government this week announced cuts to welfare spending that will save 5 billion pounds a year by the end of the decade, angering some lawmakers in the ruling Labour Party.

Reeves is expected to say she will slow planned increases in spending to restore much of the rest of her fiscal wiggle room.

Public sector net debt, excluding public sector banks, was equivalent to 95.5% of annual economic output last month, 0.1 percentage points higher than a year ago and close to levels last seen in the early 1960s.

Public sector net liabilities rose to 82.9% of GDP in February, up from 82.6% in January.

($1 = 0.7733 pounds)

(Reporting by Suban Abdulla and William Schomberg)