More blows for Rachel Reeves as government borrowing hit highest outside Covid in April despite huge NICs raid… with signs the economy is still stalling

Rachel Reeves’ woes deepened today as government borrowing hit a grim new mark despite her huge tax raid – and experts warned she will have to increase the burden on Brits again.

The embattled Chancellor saw the public sector rack up £20.2billion of borrowing last month, far more than the £17.6billion analysts had expected.

The level was £1billion higher than the same month last year, and a record outside of Covid. There was another higher figure in April 2012, but that was warped by the effects of Royal Mail privatisation.

Meanwhile, closely-watched PMI numbers suggested UK plc has effectively flatlined for a second month. 

The S&P flash index gave a reading of 49.4, marginally better than the 48.5 for April – but still below the 50 that represents a standstill. 

Economists said the slowdown increased deficit, plans to increase defence spending and the U-turn on winter fuel payments mean more tax rises ‘feel inevitable’.

The embattled Chancellor saw the public sector rack up £20.2billion of borrowing last month, far more than the £17.6billion analysts had expected

Meanwhile, closely-watched PMI numbers suggested the economy has effectively flatlined for a second month

While the UK’s largest sector, services, returned to growth, the manufacturing sector fell at the fastest rate since October 2023.

Comments from the PMI survey respondents suggested there were fewer concerns than April about US trade tariffs, but manufacturers said the heightened levels of uncertainty had still hit business confidence.

It comes after the UK struck a deal with the US earlier this month to slash tariffs on sectors including steel and automotive manufacturers.

Nonetheless, manufacturers reported the fastest pace of job cuts for five years, as the impact of rising employer taxes continued to affect companies after the policy came in at the start of April.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: ‘After an ‘awful April’, businesses reported a milder May.

‘Sunny weather also provided a welcome boost to business activity in some parts of the economy.

‘However, output still fell slightly when measured across all goods and services for a second successive month, hinting at the possibility of the economy contracting in the second quarter.

‘Furthermore, although brighter news on tariffs and trade appears to have helped restore some confidence among businesses, sentiment about prospects in the year ahead is still subdued.

‘Job cutting consequently remains worryingly aggressive, especially in manufacturing, as concerns about weak demand have been exacerbated by the rise in staff costs linked to the national insurance and minimum wage changes that came into effect in April.’

Government revenues were driven upwards in April by Labour’s national insurance hike on employers. 

However, that was outweighed by a surge in central government departmental spending on goods and services. That rose by £4.2billion year-on-year due to pay increases and inflation.  

ONS Deputy Director for Public Sector Finances Rob Doody said: ‘At £1billion higher than the same time last year, this April’s borrowing was the fourth highest for the start of the financial year since monthly records began more than 30 years ago.

‘Receipts were up on last April, thanks partly to the higher rate of National Insurance contributions. However, this was outweighed by greater spending, due to rising public services’ running costs and increases in many benefits and state pensions.’

Ms Reeves – in Canada for a G7 meeting – is facing increasing questions over whether she can meet her fiscal rule of balancing day-to-day spending with revenues by 2029-30.

Keir Starmer announced yesterday that the massively unpopular winter fuel allowance cuts for millions of pensioners are being rolled back.

However, that could cost billions of pounds and the PM refused to rule out even more tax rises. It has emerged that Angela Rayner urged Ms Reeves to hike the burden on savers and the wealth before the Spring Statement. 

The rise in borrowing was largely linked to increases in public sector pay, national insurance payments and higher benefits and state pensions.

Central government departmental spending on goods and services rose by £4.2 billion year-on-year to £37.9 billion due to April pay increases and cost inflation.

Meanwhile, social benefits paid by the state rose £1.3 billion to £26.8 billion after inflation-linked rises in many benefits.

Debt interest has been creeping up amid global uncertainty 

Public sector net debt was estimated at 95.5 per cent of UK GDP (gross domestic product) at the end of April 2025, meaning the proportion of debt was 0.7 percentage points higher than a year earlier and remains at levels last seen in the early 1960s.

Chief Secretary to the Treasury Darren Jones said: ‘After years of economic instability crippling the public purse, we have taken the decisions to stabilise our public finances, which has helped deliver four interest rate cuts since August, cutting the cost of borrowing for businesses and working people.’

But shadow chancellor Mel Stride said: ‘The latest borrowing figures expose the true cost of Labour’s reckless economic policies.

‘Instead of reining in spending, the Labour Chancellor has piled billions onto the national debt by fiddling the fiscal rules and maxing out the national credit card.

‘This follows on from borrowing last financial year coming out billions of pounds higher than the plans Labour inherited, and means wasting billions more pounds of taxpayers’ money on debt interest.’

Ruth Gregory, deputy chief UK economist at Capital Economics, said: ‘April’s public finances figures showed that despite the boost from the rise in employers’ national insurance (NI) contributions, the fiscal year got off to a poor start.

‘With the PM announcing a partial U-turn on the cut to winter fuel payments, the dilemma faced by the Chancellor over how to deal with increased spending pressures in an environment of low economic growth and high interest rates hasn’t gone away.

‘With the markets seemingly uneasy about more public borrowing, further tax rises are starting to feel inevitable.’

Matt Swannell, chief economic adviser to the EY Item Club, said higher borrowing and pressure from US tariff plans on economic growth could ‘more than eliminate the slim headroom’ against the rules.

He said: ‘A potential reversal of winter fuel payment cuts and the likelihood that defence spending will need to rise again will make the fiscal arithmetic even more challenging and increase the pressure to generate more revenue through tax rises.’