UK borrowing tops official forecasts again as Reeves readies budget

By William Schomberg

LONDON (Reuters) -British public borrowing in the first six months of the tax year came in higher than official forecasts, data showed on Tuesday, underscoring the challenge facing finance minister Rachel Reeves in her first budget next week.

Borrowing hit 79.6 billion pounds ($103.50 billion) between April and September - almost 7 billion pounds more than expected by the Office for Budget Responsibility which produces the projections that underpin government budgets.

In September alone borrowing stood at 16.6 billion pounds, less than a median forecast of 17.5 billion pounds in a Reuters poll of economists but higher than the OBR's projection of 15.1 billion pounds made earlier this year.

It was the third biggest September borrowing total since records began in 1993.

The bigger-than-expected borrowing so far in this financial year has been driven by higher-than-expected public spending.

Alex Kerr, an economist with Capital Economics, said the figures highlighted the limited scope Reeves had to increase day-to-day spending without raising taxes.

"That said, if she tweaks her fiscal rules, she will still have room to raise public investment," Kerr said.

Reeves - who wants to increase public spending to improve services and upgrade Britain's infrastructure - has said taxes will go up but she has ruled out increases in most of the main rates of taxation.

Prime Minister Keir Starmer has said the burden should fall on those with the broadest shoulders.

That means increases are expected in taxes paid mostly by wealthier individuals, such as capital gains, dividend and inheritance taxes, as well as employers' contributions to the social security system.

Some employers groups have warned that higher taxes on them will run counter to the new government's target of doubling the pace of Britain's economic growth.

Reeves has accused the former Conservative government of leaving her with a 22 billion-pound fiscal shortfall due to over-spending.

The Conservatives deny the claim and say Reeves is setting the stage for tax increases that she will seek to pin on them.

Deputy finance minister Darren Jones, responding to Tuesday's data, kept up the attacks on the former government for the state of the public finances

"Resolving this black hole at the budget next week will require difficult decisions to fix the foundations of our economy and begin delivering on the promise of change," Jones said in a statement.

Reeves is widely expected to change the government's self-imposed fiscal rules to give herself more room to borrow for investment although, mindful of the 2022 bond market crisis sparked by former prime minister Liz Truss's plans for big tax cuts, she is likely to move carefully, investors say.

The ONS said public debt stood at 98.5% of gross domestic product in September and the ONS said it was no longer estimated to have hit 100% in August which was now shown at 98.8%.

($1 = 0.7691 pounds)

(Reporting by William Schomberg; Editing by Kate Holton and Andrew Heavens)