Key facts
- UK government borrowing in August was £18.3bn, up nearly a fifth from the previous year.
- Interest payments on government debt reached £8.8bn in August, the highest for the month since 1997.
- UK consumer price inflation rose to 3.1% in the year to August, its highest rate in five months.
- The government is borrowing more than official forecasters expected, according to the ONS.
- The Institute for Fiscal Studies warned that debt interest spending is a 'worryingly large share' of government spending.
The UK government borrowed £18.3bn in August, a nearly 20% increase from the previous year, as higher inflation pushed up spending. This figure exceeds the expectations of official forecasters, placing additional pressure on Chancellor John Healey as he prepares for his first Budget on October 28.
Inflation in the UK reached its highest point in five months in August, primarily due to increased petrol and diesel prices. Despite higher tax receipts compared to the previous year, government spending on public services, benefits, and other costs also rose significantly due to escalating price increases.
The cost of servicing government debt surged to £8.8bn in August, marking the highest level for the month since records began in 1997. The Institute for Fiscal Studies (IFS) highlighted this as a concern, noting that debt interest payments now constitute a substantial portion of overall government expenditure and have increased since the last forecasts from the Office for Budget Responsibility (OBR).
Nick Ridpath, a research economist at the IFS, stated that both higher borrowing costs and inflation complicate the chancellor's efforts to reduce borrowing and fund government priorities. Ruth Gregory, deputy UK chief economist at Capital Economics, described the situation as a "dismal backdrop for the autumn Budget," predicting that the government will likely continue to borrow more than anticipated due to a weakening economy.
Gregory suggested that many of Prime Minister Andy Burnham's policy goals might be scaled back or postponed to avoid significant tax increases or negative market reactions. Emma Reynolds, chief secretary to the Treasury, emphasized the UK's economic growth potential, contingent on fiscal discipline, and the need to ensure funding for public services. She affirmed the government's commitment to its fiscal rules.
However, Conservative shadow chancellor Andrew Griffith criticized the Labour government for losing control of public finances. Martin Beck, chief economist at WPI Strategy, advised against overinterpreting single-month figures due to volatility but pointed to concerning elements, such as a quarter of government debt being inflation-linked, which could increase future interest costs. He noted that while this is an "unwelcome setback," the government typically focuses on the OBR's medium-term forecasts, which also present challenges due to rising interest costs.