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The Fiscal Squeeze

UK Borrowing Hits Five-Year High Amid Debt Interest Surge

Tuesday, 21 October 2025 08:54

Abstract

The United Kingdom's public finances have deteriorated sharply, with government borrowing for September 2025 reaching its highest level since the height of the COVID-19 pandemic. The surge, driven by record debt interest payments and rising welfare costs, has all but eliminated the Chancellor's fiscal headroom, presenting a profound challenge to the government's core economic mandate ahead of the autumn budget.

Historical Context

Recent Findings

A September Deficit Not Seen Since the Pandemic

The UK public sector net borrowing, excluding public sector banks, reached £20.2 billion in September 2025. This figure represents an increase of £1.6 billion compared to the same month in 2024. The Office for National Statistics (ONS) confirmed that this was the highest September borrowing total recorded since 2020. The September figure was also slightly above the £20.1 billion forecast made by the Office for Budget Responsibility (OBR) in March 2025. The cumulative borrowing for the first half of the financial year, from April to September 2025, totalled £99.8 billion. This six-month total is the second-highest April-to-September borrowing figure since monthly records began in 1993. The only period with a higher figure was the equivalent six months in 2020, during the peak of the government's emergency spending response to the coronavirus pandemic. The borrowing figure for September 2020 stood at £36.1 billion. The current budget deficit, which measures borrowing for day-to-day public sector activities, reached £13.4 billion in September 2025. This deficit for routine spending was £2.3 billion, or 21.2%, more than the figure recorded in September 2024. Central government was responsible for £16.9 billion of the total £20.2 billion borrowed in September 2025.

The Unrelenting Cost of Debt and Inflation

The primary driver behind the elevated borrowing is the soaring cost of servicing the national debt. Central government debt interest costs reached £9.7 billion in September 2025. This figure represents the highest interest payable on central government debt for any September on record. A significant portion of this cost is attributed to the structure of the UK's debt portfolio, specifically the index-linked gilts. The interest payments on these gilts are tied directly to the Retail Prices Index (RPI) measure of inflation. The September 2025 interest bill included £2.7 billion of 'capital uplift' due to the RPI's movement. This particular uplift was a result of the 0.4% increase in the Retail Prices Index between June and July 2025. Beyond debt interest, the government's day-to-day running costs have also increased substantially. Central government departmental spending on goods and services rose by £2.6 billion to £38.3 billion in September 2025, driven by pay rises and general inflation. Furthermore, inflation-linked increases to welfare payments and state pensions contributed to the higher expenditure. The rise in spending on public services, benefits, and debt interest collectively outweighed the increase in central government receipts from taxes and National Insurance contributions. Tax receipts did increase by an estimated £6.7 billion, or 9.2%, compared with September 2024, partly due to a rise in employer National Insurance rates introduced in April.

The Erosion of Fiscal Headroom

The persistent overshoot in borrowing has created a significant fiscal challenge for the Chancellor of the Exchequer, Rachel Reeves, ahead of the autumn budget scheduled for 26 November. The total borrowing of £99.8 billion for the first six months of the financial year is £7.2 billion more than the OBR's March 2025 forecast for the same period. This shortfall has been widely interpreted by economists as having 'all but exhausted' the Chancellor's initial fiscal headroom. The government operates under two primary fiscal rules, enshrined in law through the Charter for Budget Responsibility. The first, the 'stability rule,' mandates that day-to-day spending must be matched by tax revenues, meaning the government should only borrow to invest. The target is to bring the current budget into surplus by the financial year 2029/30. The second, the 'investment rule,' requires the government to reduce net financial debt as a share of the economy. The current borrowing trajectory, particularly the widening current budget deficit, places immense pressure on the stability rule. To meet the fiscal targets, the Chancellor faces a difficult choice between announcing significant tax increases, implementing deep cuts to public spending, or accepting a breach of the self-imposed fiscal rules. Economists have suggested that the Chancellor may need to find tens of billions of pounds in fiscal consolidation measures to remain compliant with the rules.

Debt-to-GDP and the Shadow of the 1960s

The national debt, measured as public sector net debt excluding public sector banks, stood at 95.3% of Gross Domestic Product (GDP) at the end of September 2025. This ratio is 1.0 percentage point higher than it was at the end of September 2024. The ONS noted that this level of debt-to-GDP is comparable to those last seen in the early 1960s. The comparison to the 1960s, however, highlights a crucial difference in the underlying economic dynamics. In the financial year 1960/61, the government's debt-to-GDP ratio was 102.4%. Crucially, the debt burden was on a clear downward trajectory throughout that decade, a trend that had been in place since the end of the Second World War. This reduction was facilitated by relatively low public sector borrowing and robust nominal GDP growth, which averaged 3.5% in the 1960s. By the end of the decade, in 1969/70, the debt-to-GDP ratio had fallen significantly to 61.2%. The current situation is marked by a rising debt-to-GDP ratio, which has increased by more than 60 percentage points over the last two decades. This increase is primarily a result of accumulated primary deficits, reflecting a persistent gap between government receipts and spending on services and investment. The current debt level, therefore, is not a residual of a past conflict being eroded by growth, but a contemporary challenge driven by a succession of economic shocks and structural spending pressures.

Conclusion

The September 2025 borrowing figures underscore the structural nature of the UK's fiscal difficulties, moving beyond the immediate shocks of the pandemic and energy crisis. The combination of historically high debt interest costs, exacerbated by inflation-linked gilts, and rising day-to-day spending on public services and welfare has created a persistent deficit. The resulting erosion of the Chancellor's fiscal headroom means that the government's commitment to its own fiscal rules is now under intense scrutiny. The challenge for the upcoming budget is not merely to manage a temporary spike in borrowing, but to articulate a credible, long-term strategy for fiscal consolidation that can simultaneously address the structural spending pressures and put the national debt on a sustainable, downward path, a feat that requires a fundamental shift in the current economic trajectory.

References

  1. Current time information in Dumfries and Galloway, GB.

    Used to establish the current date and time for the 'Today's Date' field.

  2. Public sector finances, UK: September 2025 - Office for National Statistics

    Primary source for the September 2025 borrowing figure (£20.2bn), the FY-to-date figure (£99.8bn), the comparison to 2020, the debt-to-GDP ratio (95.3%), the current budget deficit (£13.4bn), the breakdown of spending increases (debt interest, departmental, welfare), and the central government borrowing figure (£16.9bn).

  3. Public sector finances, UK: September 2020 - Office for National Statistics

    Provides the exact historical context for the 'highest since 2020' claim, stating the September 2020 borrowing figure was £36.1 billion and the FY-to-date figure was £208.5 billion.

  4. UK public borrowing climbs to four-year high in September - Investing.com

    Confirms the £20.2bn figure, the £9.7bn debt interest cost, the £2.7bn index-linked gilt component, the 0.4% RPI increase, and the debt-to-GDP ratio of 95.3%.

  5. Charter for Budget Responsibility approved by Parliament - GOV.UK

    Details the government's two main fiscal rules: the 'stability rule' (borrowing only to invest) and the 'investment rule' (reducing net financial debt as a share of the economy), and the target of a current budget surplus by 2029/30.

  6. UK Government borrowing surges to highest September figure in five years | Reading Chronicle

    Confirms the £20.2bn figure, the 'highest September borrowing since 2020' claim, and the general drivers (debt interest, public services, benefits).

  7. Rachel Reeves's fiscal headroom 'all but exhausted' as borrowing rises over forecast; Amazon Web Services outage 'resolved' – business live - The Guardian

    Provides the crucial context of the OBR forecast overshoot (£7.2bn more than the £92.6bn forecast), the resulting pressure on Chancellor Rachel Reeves, and the consensus that her fiscal headroom is 'all but exhausted'.

  8. UK Government borrowing surges to highest September figure in five years | South Wales Guardian

    Confirms the £20.2bn figure, the 'highest September borrowing since 2020' claim, and the general drivers (debt interest, public services, benefits).

  9. Effects of the economy on public sector net debt, UK - Office for National Statistics

    Provides the long-term context for the debt-to-GDP ratio, noting the increase over the last two decades and attributing it to accumulated primary deficits and a succession of economic shocks.

  10. UK September borrowing hits 5-year high at PS20.2 billion | AJ Bell

    Confirms the £20.2bn figure, the £9.7bn debt interest cost, the £2.7bn index-linked gilt component, the debt-to-GDP ratio of 95.3%, and the comparison to the early 1960s.

  11. Rachel Reeves has made welcome changes to the fiscal rules | Institute for Government

    Confirms the initial fiscal headroom of £9.9bn against the most binding rule (current budget balance).

  12. The UK economy in the 1960s - House of Lords Library

    Provides the detailed historical context for the debt-to-GDP comparison, including the 1960/61 ratio of 102.4%, the average GDP growth of 3.5%, and the falling debt burden to 61.2% by 1969/70.