UK government borrowing rose more than expected to £18.3bn in August, driven by rising interest payments and adding to the challenges facing Andy Burnham’s government ahead of a high-stakes Budget next month.
The shortfall between government spending and income was £3.5bn greater than the figure forecast by the Office for Budget Responsibility, the UK’s fiscal watchdog.
The increase came as higher inflation drove up government spending on public services and debt interest, outpacing growth in tax receipts.
Tuesday’s figure from the Office for National Statistics underlined the pressure on Chancellor John Healey, who is preparing voters for a tough Budget on October 28 after government borrowing costs hit multiyear highs on the back of the Middle East energy shock.
A sell-off in bond markets triggered by inflation concerns and the Middle East war has driven up the cost of government borrowing around the world, putting pressure on public finances. The UK has been acutely affected, with yields at the highest among G7 nations.
On Tuesday morning the UK 10-year yield — the benchmark interest rate for new borrowing — was up 0.01 percentage points at 5.23 per cent, broadly in line with European peers.
Economists estimate that higher interest payments have slashed the headroom Healey has against the government’s key fiscal rule, which requires the current budget, excluding investment spending, to be brought into surplus by the end of the parliament.
Ruth Gregory, an economist at Capital Economics, said Tuesday’s figures painted a “dismal picture” of the fiscal situation in the UK.
In the Budget, “many of the PM’s policy ambitions will be reined in or delayed to avoid big tax hikes and/or a backlash in the markets”, she predicted.
In the fiscal year to August, government borrowing was £77.3bn, about £8.1bn above the OBR’s March forecast.
Public sector net debt was £2.985tn, equivalent to 93.8 per cent of GDP. That was 1.3 percentage points lower than a year earlier.
Central government debt interest payments hit £8.8bn in August, the highest nominal figure for that month since records began in 1997, reflecting the impact of inflation on index-linked bonds.
Gregory said the UK’s debt interest payments were on track to hit 3.8 per cent of GDP in 2026-27, well above the average of 2.1 per cent in the 2010s. The deterioration in the current fiscal year has also been driven by extra spending on welfare and higher-than-expected investment.
“Borrowing more is becoming an increasingly expensive way to solve the government’s problems,” said Thomas Pugh, chief economist at audit firm RSM UK. “It seems inevitable, therefore, that further tax rises will have to be announced in the Budget.”
Many economists expect the forecast for the government’s fiscal headroom — the buffer against its main borrowing rule — will be cut in half by the OBR heading into the upcoming Budget. The margin stood at just under £24bn in March.
That will restrict the government’s room for extra cost of living measures to alleviate the energy crisis, analysts warned, given the need to repair the public finances and shore up market confidence.
However, in its own analysis of the year-to-date figures, the OBR underlined the “highly provisional” nature of the public finances numbers, especially in relation to departmental spending and borrowing by local authorities.
It said it expects tax receipts to be “more skewed towards the end of the financial year” compared with most years, which should reduce borrowing later in the year. This is partly because of receipts stemming from transitional features in Labour’s reforms to the previous non-domicile tax regime.
Emma Reynolds, chief secretary to the Treasury, said: “At a time when debt interest costs billions of pounds that could otherwise be spent on improving lives, we must always know where the money is coming from to pay for public services.
“That is why we are committed to meeting our fiscal rules with a buffer against uncertainty, taking the tough decisions needed to keep the public finances on a sustainable path.”
Andrew Griffith, the Conservative shadow chancellor, said Labour had “lost control of the public finances”.
He added: “Only the Conservatives will make the tough choices on welfare and public spending to get Britain’s finances under control.”
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