Bad news for Chancellor John Healey 5 weeks before his first Budget
Key Points
- Government borrowed £18.3 billion in August, £3.5 billion above the OBR forecast
- Debt interest spending hit £8.8 billion, the highest August figure since 1997
- Borrowing for the year to date stands at £77.3 billion, £8.1 billion over forecast
- Higher spending, not weaker tax receipts, accounts for the overshoot
- Quilter Cheviot and the Resolution Foundation both expect pressure to persist into the Budget
The UK government borrowed £18.3 billion in August, £3.5 billion more than the Office for Budget Responsibility forecast, according to public sector finances data published by the Office for National Statistics on Tuesday (22 September).
Wealth manager Quilter Cheviot said the figure was £2.9 billion, or 19%, higher than the same month last year, and the Resolution Foundation said it was the second-highest August on record after the pandemic.
Borrowing for the financial year to August reached £77.3 billion, which is £8.1 billion above the OBR’s forecast for the period.
Debt interest spending reached £8.8 billion in August, the highest August figure since monthly records began in 1997. Around £2.1 billion of that came from inflation-linked government bonds, whose repayment value rose with the 0.3% increase in RPI between May and June.
Tax receipts ran £1.1 billion above forecast over the first five months of the year, which means higher spending accounts for all of the overshoot in borrowing.
Central government spending came in £6.3 billion above forecast in the year to date, with inflation pushing up debt interest and benefit payments by £4.5 billion of that total.
“While oil prices have fallen back towards $100 a barrel and bond yields have eased in the last few days, the outlook for the public finances remains challenging,” said Jonathan Raymond, Investment Manager at Quilter Cheviot. “With the Federal Reserve having raised interest rates and the Bank of England still expected to tighten policy further, borrowing costs are likely to remain elevated.”
Raymond said much of the spending announced so far amounted to a reallocation of existing funding rather than significant new expenditure.
He added that the Chancellor’s apparent willingness to explore greater flexibility within the fiscal rules suggested there could be more borrowing to come, which would put further pressure on government borrowing costs.
“The government’s fiscal position remains stretched and is likely to stay that way unless economic growth improves meaningfully,” he said.
“Markets will be watching closely for any indication of how the government intends to balance its spending ambitions with fiscal credibility, with markets unlikely to provide the Chancellor with any benefit of the doubt.”
Think tank the Resolution Foundation said conflict in the Middle East had pushed up the cost of servicing the national debt, which it expects to add £10 billion to £15 billion to borrowing in 2029-30, the year in which the fiscal rules bind.
“Five weeks out from the Budget, the public finances remain on shaky ground, with borrowing this year already above the OBR’s forecast,” said James Smith, chief economist at the Resolution Foundation.
“And the picture looks likely to get worse this winter, as rising inflation driven by spiralling energy and petrol prices will mean higher government borrowing costs and a further squeeze on living standards.”
Smith said Healey would need to think carefully about how to help families without fuelling further deterioration in the public finances, and that any support should go to those who need it most.
He added that the Chancellor could not afford to pass the Budget with reduced headroom that left him little buffer against fresh shocks.
