The UK government’s borrowing in February surpassed expectations, increasing pressure on Chancellor Rachel Reeves ahead of her Spring Statement next week. Official figures show borrowing—the gap between government spending and tax revenue—reached £10.7bn last month, significantly higher than the £6.5bn forecasted by the government’s independent forecaster.

Reeves is expected to announce spending reductions in an effort to adhere to her self-imposed economic rules, which the Treasury emphasized are "non-negotiable." Chief Secretary to the Treasury Darren Jones stated the government must act swiftly to build a more efficient and productive state while ensuring responsible financial management.

Economists warn that the unexpectedly high borrowing levels add further strain on the Chancellor as she prepares for the Spring Statement on Wednesday. Dennis Tatarkov, senior economist at KPMG, suggested the latest figures increase the likelihood that Reeves may struggle to meet her borrowing targets.

Most advanced economies have fiscal rules in place to reassure investors and uphold financial market confidence. Reeves’ key fiscal commitments include avoiding borrowing for routine public spending and ensuring that national debt declines as a share of GDP by 2029/30. Isabel Stockton, a senior researcher at the Institute for Fiscal Studies, pointed out that Reeves' commitment to meeting fiscal targets while ruling out further tax hikes and avoiding deep public service cuts has left her with limited options.

Alex Kerr, UK economist at Capital Economics, anticipates further spending reductions in addition to previously announced welfare cuts. In October, the Office for Budget Responsibility (OBR) estimated Reeves had £9.9bn in fiscal headroom under her borrowing rules. However, next week’s updated OBR assessment is expected to show that this buffer has been eliminated.

According to Pantheon Macroeconomics, the UK’s fragile public finances will necessitate further spending cuts in the Spring Statement, with tax increases likely in October. In response to rising welfare costs, the government recently outlined significant changes to the benefits system, aiming to save £5bn annually. These include stricter eligibility criteria for Personal Independence Payments (PIP), impacting hundreds of thousands of claimants, and freezing incapacity benefits at £97 per week until 2029/30.

Additionally, the prime minister has announced plans to dismantle NHS England and several other government agencies. Despite these cutbacks, defence spending will rise, funded by reallocations from the international aid budget. Liberal Democrat Treasury spokesperson Daisy Cooper criticized the latest borrowing figures, calling them a major setback for the Chancellor’s economic strategy. She also warned that the upcoming increase in employer National Insurance contributions in April would place additional financial strain on small businesses.

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