UK Borrowing Hits £18.3bn as Debt Interest Hits Record for August

UK government borrowing reached £18.3bn in August, almost a fifth higher than a year earlier and £3.5bn more than official forecasters expected, according to the Office for National Statistics (ONS).

The overshoot lands weeks before Chancellor John Healey delivers his first Budget at the end of October. It was driven by persistently higher inflation, which rose in August to its highest rate in five months on the back of higher petrol and diesel prices.

The mechanics are simple. Tax receipts rose year on year, but spending on public services, benefits and other costs grew faster as prices climbed. The interest bill on government debt hit £8.8bn in August — the highest August level since records began in 1997.

That debt-servicing cost hits as the government faces pressure to spend more on defence and cost-of-living support for households, said Martin Beck, chief economist at WPI Strategy.

Beck cautioned against reading too much into one month. It was important not to "overinterpret a single month given the volatility in the numbers", he said, though he flagged some "concerning elements". The cost of paying interest on government debt is likely to rise in the coming months, he added.

While the August figures were an "unwelcome setback", Beck noted that the government typically looks at the Office for Budget Responsibility's medium-term fiscal forecast — its expectations for the public finances three years into the future.

"But even there, the chancellor's got problems," he said. "The cost of that interest has gone up. That's going to feed through into more borrowing."

The Institute for Fiscal Studies (IFS) warned that spending on debt interest is "a worryingly large share of overall government spending and has been pushed up" since the OBR's last official forecasts.

"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," said IFS research economist Nick Ridpath.

The inflation link

The problem is structural. The interest rate the government pays on roughly a quarter of its debt tracks the Retail Prices Index, which typically runs higher than the headline Consumer Prices Index. The most recent ONS data showed RPI inflation at 3.4% in the year to August, against a CPI reading of 3.1%.

Consumer price inflation has now been above target for months, weighing on the UK economy. The August rise was pushed up in part by the fallout from the US-Israel war in Iran.

Ruth Gregory, deputy chief UK economist at Capital Economics, called the figures "a dismal backdrop for the autumn Budget, with the government once again borrowing more than expected". She said the numbers raise the likelihood that many of Prime Minister Andy Burnham's policy ambitions will be "reined in or delayed to avoid big tax hikes and/or a backlash in the markets".

With the economy weakening, Gregory added, the government is likely to keep borrowing more than expected.

Political battle lines

Emma Reynolds, chief secretary to the Treasury, said the UK has "huge potential" for economic growth, but only with "fiscal discipline" from the government.

"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," she said. She added that the government remains committed to its fiscal rules "with a buffer against uncertainty".

Conservative shadow chancellor Andrew Griffith attacked from the other side, saying the Labour government had "lost control of the public finances" by overshooting the OBR's forecasts. "Only the Conservatives will make the tough choices on welfare and public spending to get Britain's finances under control," he said.

Economists estimate the chancellor may need to find £15bn — possibly through tax rises — to meet the government's self-imposed spending rules.

With debt interest costs still climbing and inflation above target, the October Budget looks set to be defined by how Healey closes that gap: through tax rises, delayed spending, or a fiscal rule rethink that risks unsettling the markets.