We can thank Rachel Reeves for one thing: setting up a real-world experiment to show the Laffer curve in action. April’s figures for the public finances, like yesterday’s figures for inflation, are truly dreadful. April should have been a bumper month for tax receipts, being the month that the rise in Employers’ National Insurance Contributions (NICs) came into effect. Instead, borrowing surged to £20.2 billion in a single month. It took borrowing for the year 2024/25 to £148.3 billion, a smidgeon less that the Office for National Statistics (ONS) estimated last month but £11 billion higher than the Office for Budget Responsibility (OBR) had forecast.
Government receipts in April did advance by a fairly modest £5.6 billion compared with April 2024. However, this was outpaced by growth in spending, which was up £6.6 billion compared with April 2024, thanks to higher public sector wages and galloping benefits claims. Departmental spending in April was up £4.2 billion compared with a year earlier and the benefits bill was up £1.3 billion. The net effect was a government that is more indebted than it was last year: public debt as a proportion of GDP was up 0.7 percentage points over the year to 95.6 per cent.
Servicing debt is becoming a very significant part of the government’s budget
It is a clear warning to the Chancellor: if you cannot improve the public finances after a ‘one-off’ round of stiff tax rises, you are probably not going to improve the situation by repeating the exercise, as the government seems to indicate may well happen in the autumn Budget. As employers have warned many times since the budget, jack up their NI bill and they will employ fewer people. The government will therefore not receive all the money that the tax rise might theoretically be expected to bring in. Moreover, the increase in employers’ NI, as we saw yesterday, has contributed to a sharp rise in inflation.
This, too, promises to have second-round effects on the public finances, as it means interest rates will stay higher for longer. One positive piece of news is that the government had to spend £0.5 billion less in April 2025 servicing its debts than it had to spend in April 2024, as interest rates fell. However, the government can no longer hope for two further interest rate cuts this year to help bail it out. At £100 billion a year, servicing debt is becoming a very significant part of the government’s budget – more than it spends on education or health.
There is a message here for Reeves, if she is prepared to hear it: you are not going to resolve the awful state of the public finances through tax rises alone. If you are to retain a grip, there will have to be large cuts in public spending, too.
But the Labour party, sadly, seems in no such mood to contemplate such a path, as the fuss over modest cuts in welfare benefits shows. To listen to many Labour MPs, you would think welfare secretary Liz Kendall had just gone and kicked away someone’s crutches rather than simply try to rein in a galloping benefits bill. April’s borrowing figures show that national bankruptcy beckons – but that it will take a while longer for this to dawn on the government.
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