Government borrowing rose significantly more than expected last month as debt interest payments soared.

Official figures show the cost of public services and interest payments on government debt rose faster than the increases in income tax and national insurance contributions.

It means government borrowing reached the second-highest level in June since records began in 1993, according to data from the Office for National Statistics (ONS).

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June’s borrowing figures – £20.684bn – were second only to the highs seen in the early days of the COVID-19 pandemic in 2020, when many workers were furloughed.

The figure was a surprise, nearly £4bn higher than anticipated by economists polled by Reuters.

State borrowing – the difference between income from things like taxes and expenditure on the likes of public services – was more than £6bn higher than the same month last year.

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Pushing the borrowing figure up was the high cost of interest payments, which was the second-highest June figure since those records began in 1997. Only June 2022 saw higher spending on government debt.

But despite the latest rise, borrowing this year is in line with the March forecast from the independent forecasters at the Office for Budget Responsibility (OBR), though it’s the second month in a row borrowing was above its projections.

It’s bad news for Chancellor Rachel Reeves, who has vowed to bring down government debt and balance the budget by 2030 as part of her self-imposed fiscal rules.

She’s expected to increase taxes to meet the gap between spending and tax revenue.

The pressure is such that analysts from economic research firm Pantheon Macroeconomics said: “Autumn tax hikes are likely and will probably be backloaded.”

Rob Wood, its chief UK economist, estimated the size of the gap between government expenditure and income has grown.

“All told, we estimate that the chancellor’s £9.9bn of headroom has turned into a £13bn hole, meaning that Ms Reeves would need to raise taxes or cut spending by a little over £20bn in the autumn budget to restore her slim margin of headroom,” he said.

“We expect ‘sin tax’ and duty hikes, freezing income tax thresholds for an extra year in 2029 and a pensions tax raid – reinstating the lifetime limit on pension pots and cutting relief – to fill most of the hole.”

Taxes on goods such as alcohol and tobacco are classed as sin taxes.

Darren Jones, Ms Reeves’s deputy as the chief secretary to the Treasury, said: “We are committed to tough fiscal rules, so we do not borrow for day-to-day spending and get debt down as a share of our economy.”

“This commitment to economic stability means we can get on with investing in Britain’s renewal.”

Faced with a challenging set of numbers, the chancellor is having to make difficult choices with political consequences.

Tax rises and spending cuts are a hard sell.

Now, some in her party are calling for a different approach: target the wealthy.

Is there a way out of all of this for the chancellor?

Economic growth is disappointing and spending pressures are mounting. The government was already examining ways to raise revenue when, earlier this month, Labour backbenchers forced the government to abandon welfare cuts and reinstate winter fuel payments – blowing a £6bn hole in the budget.

The numbers are not adding up for Rachel Reeves, who is steadfastly committed to her fiscal rules. Short of more spending cuts, her only option is to raise taxes – taxes that are already at a generational high.

For some in her party – including Lord Kinnock, the former Labour leader, the solution is simple: introduce a new tax.
They say a flat wealth tax, targeting those with assets above £10m, could raise £12bn for the public purse.

Yet, the government is reportedly reluctant to pursue such a path. It is not convinced that wealth taxes will work. The evidence base is shaky and the debate over the efficacy of these types of taxes has divided the economics community.

Why are we talking about wealth?

Wealth taxes are in the headlines but calls for this type of reform have been growing for some time. Proponents of the change point to shifts in our economy that will be obvious to most people living in Britain: work does not pay in the way it used to.

At the same time wealth inequality has risen. The stock of wealth – that is the total value of everything owned – is much larger than our income, that is the total amount of money earned in a year. That disparity has been growing, especially during that era of low interest rates after 2008 that fuelled asset prices, while wages stagnated.

It means the average worker will have to work for more years to buy assets, say a house, for example.

Left-wing politicians and economists argue that instead of putting more pressure on workers – marginal income tax rates are as high as 70% for some workers – the government should instead target some of this accumulated wealth in order to balance the books.

The Inheritocracy

At the heart of it all is a very straightforward argument about fairness. Few will argue that there aren’t problems with the way our economy is functioning: that it is unfair that young people are struggling to buy homes and raise families.

Proponents of a wealth tax say that it would not only raise revenue but create a fairer tax system.

They argue that the wealth distortions are creating a divided society, where people’s outcomes are determined by their inheritances.

The gap is large. A typical 50-year old born to the poorest 20% of parents in the UK is already worth just a quarter of what someone born to the richest 20% of parents is worth at that age. This is before they inherit anything when their parents die.

A lot of money is passed on earlier; for example, people may have had help buying their first home. That gap widens when the inheritance is passed on. This is when inheritance tax, one of the existing wealth taxes we have in the UK, kicks in.

However, its impact in addressing that imbalance is negligible. Most people don’t meet the threshold to pay it. The government could bring more people into the tax but it is already a deeply unpopular policy.

Alternatives

So what other options could they explore?

Lord Kinnock recently suggested a new tax on the stock of wealth – one to two percent on assets over £10m. That could raise between £12bn and £24bn.

When making the case for the tax, Lord Kinnock told Sky News: “That kind of levy does two things. One is to secure resources, which is very important in revenues.

“But the second thing it does is to say to the country, ‘we are the government of equity’. This is a country which is very substantially fed up with the fact that whatever happens in the world, whatever happens in the UK, the same interests come out on top unscathed all the time while everybody else is paying more for getting services.”

However, there is a lot of scepticism about some of these numbers.

Wealthier people tend to be more mobile and adept at arranging their tax affairs. Determining the value of their assets can be a challenge.

In Downing Street, the fear is that they will simply leave, rendering the policy a failure. Policymakers are already fretting that a recent crackdown on non-doms will do the same.

Critics point to countries where wealth taxes have been tried and repealed. Proponents say we should learn from their mistakes and design something better.

Some say the government could start by improving existing taxes, such as capital gains tax – which people pay when they sell a second property or shares, for example.

The Labour government has already raised capital gains tax rates but bringing them in line with income tax could raise £12bn.

Then there is the potential for National Insurance contributions on investment income – such as rent from property or dividends. Estimates suggest that could bring in another £11bn.

This is nothing to sniff at for a chancellor who needs to find tens of billions of pounds in order to balance her books.

By the same token, she is operating on such fine margins that she can’t afford to get the calculation wrong. There is no easy way out of this fiscal bind for Rachel Reeves.

Whether wealth taxes are the solution or not, hers is a government that has promised reform and creative thinking. The tax system would be a good place to start.

The government has given the final go-ahead for a £38bn nuclear power plant in eastern England.

The Sizewell C project in Suffolk will be jointly funded by Canadian pension fund La Caisse, UK energy firm Centrica and Amber Infrastructure.

The Department for Energy Security & Net Zero (DESNZ) said Sizewell C will deliver clean power for the equivalent of six million homes, as well as support 10,000 jobs and create 1,500 apprenticeships once it is operational, which is expected to be in the 2030s.

The government will be the largest shareholder in the project with a 44.9% stake. La Caisse will hold a 20% stake, Centrica 15% and Amber Infrastructure will take an initial 7.6%.

Earlier this month, French energy giant EDF announced it was taking a 12.5% stake, lower than its previously stated 16.2% ownership.

Sizewell C was initially proposed by EDF and China General Nuclear Power Group in the early 2010s, but in 2022 the Conservative government bought the Chinese company out.

The cost of construction was forecast to be around £20bn by EDF five years ago.

DESNZ said the cost is around 20% cheaper than the development of the Hinkley Point C nuclear power station in Somerset.

Energy Secretary Ed Miliband said: “It is time to do big things and build big projects in this country again – and today we announce an investment that will provide clean, homegrown power to millions of homes for generations to come.

“This government is making the investment needed to deliver a new golden age of nuclear, so we can end delays and free us from the ravages of the global fossil fuel markets to bring bills down for good.”

Chancellor Rachel Reeves said: “La Caisse, Centrica and Amber’s multibillion-pound investment is a powerful endorsement of the UK as the best place to do business and as a global hub for nuclear energy.

“Delivering next generation, publicly owned clean power is vital to our energy security and growth, which is why we backed Sizewell C.”

Alison Downes of campaign group Stop Sizewell C said: “This much-delayed final investment decision has only crawled over the line thanks to guarantees that the public purse, not private investors, will carry the can for the inevitable cost overruns.

“Even so, UK households will soon be hit with a new Sizewell C construction tax on their energy bills. It is astounding that it is only now, as contracts are being signed, that the government has confessed that Sizewell C’s cost has almost doubled to an eye-watering £38bn – a figure that will only go up. Given that ministers claimed not to recognise the cost was close to £40bn is there any wonder there is so little trust in this project?”

The government considers nuclear power to be an increasingly important energy source as it seeks to decarbonise Britain’s energy grid by 2030.

The last time Britain completed a nuclear plant was the Sizewell B plant in 1987.