UK Borrowing Jumps in August, Pressuring Chancellor Ahead of Budget

Government borrowing came in higher than forecasters expected in August, the Office for National Statistics said, adding fresh strain on Chancellor John Healey a month before he delivers his first Budget. The gap between what the government spent and what it collected in tax reached £18.3bn for the month, according to the ONS, a figure the agency said was almost a fifth higher than August of the previous year and about £3.5bn above what official forecasters had projected, the BBC reported.

Why did borrowing come in above forecasts?

The ONS attributed the overshoot to persistently higher inflation, which pushed up both the cost of running public services and the interest bill on government debt. Tax receipts did rise compared with a year earlier, the ONS said, but spending on public services, benefits, and debt servicing rose faster, widening the shortfall. Inflation itself climbed to its highest rate in five months in August, driven by higher petrol and diesel prices, according to the ONS data cited by the BBC.

How much is debt interest costing the government?

Interest payments on government debt hit £8.8bn in August, the ONS said, the highest figure for that month since records began in 1997. Roughly a quarter of UK government debt has interest payments linked to the Retail Prices Index, a measure of inflation that has been running higher than the more commonly cited Consumer Prices Index. RPI inflation stood at 3.4% in the year to August, versus 3.1% for CPI, the ONS reported.

"The cost of that interest has gone up. That's going to feed through into more borrowing." — Martin Beck, chief economist, WPI Strategy

Beck cautioned against reading too much into a single month's data, saying it is important not to "overinterpret a single month given the volatility in the numbers." Still, he called some elements of the report "concerning" and said the government's medium-term fiscal position, the three-year forecast the Office for Budget Responsibility relies on, has also worsened because of rising interest costs.

What does this mean for Healey's October Budget?

Healey is due to deliver his first Budget at the end of October, and the August figures narrow his room to maneuver. The Institute for Fiscal Studies said debt interest spending is now "a worryingly large share of overall government spending" and has climbed since the OBR's last official forecasts, according to IFS research economist Nick Ridpath. "Both higher borrowing costs and higher inflation make life harder for a chancellor who is looking to bring down borrowing and to spend more on government priorities," Ridpath said.

Ruth Gregory, deputy chief UK economist at Capital Economics, called the report a "dismal backdrop for the autumn Budget, with the government once again borrowing more than expected." She said the numbers raise the odds that Prime Minister Andy Burnham's policy plans get "reined in or delayed to avoid big tax hikes and/or a backlash in the markets." Gregory added that with the broader economy weakening, continued upside surprises to borrowing are likely.

How is the Treasury responding?

Emma Reynolds, chief secretary to the Treasury, defended the government's approach, saying the UK has "huge potential" for growth but only with "fiscal discipline." She noted that debt interest costs billions of pounds that could otherwise fund public services, adding that the government must weigh spending decisions against that backdrop, according to her comments carried by the BBC.

The government faces competing demands heading into the Budget, including pressure to increase defense spending and to maintain cost-of-living support for households, even as the price of servicing existing debt climbs. Whether Healey opts for tax increases, spending cuts, or some combination to offset the borrowing overshoot has not been decided publicly, and analysts differ on how much room he actually has before markets react.

Key terms

Borrowing (public sector net borrowing): the gap between what the government spends and what it raises in tax during a period, filled by issuing debt.

RPI vs. CPI: two UK inflation measures; RPI, used to calculate interest on roughly a quarter of government debt, has been running higher than the CPI headline rate.

OBR: the Office for Budget Responsibility, the independent body that produces the UK's official economic and fiscal forecasts referenced by the Treasury and chancellor.

For the full ONS-sourced figures and additional analyst commentary, see the original BBC News report.