UK government borrowing rose to a five-year high in August, official figures show, fuelling growing expectations for Rachel Reeves to raise taxes at the autumn budget.
Figures from the Office for National Statistics (ONS) showed public sector net borrowing – the difference between public spending and income – rose to £18bn in August, £3.5bn more than in the same month a year earlier.
Dealing a blow for the chancellor as she prepares for the 26 November budget, the reading was above City predictions for a deficit of £12.75bn and forecasts from the Office for Budget Responsibility (OBR) of £12.5bn.
On top of upward revisions to previous months, total borrowing for the financial year to date jumped to £83.8bn, also the highest level since the height of the Covid pandemic in 2020. The total was £16bn higher than in 2024 and above a £72.4bn forecast from the OBR.
The pound fell against the dollar after the figures were released on Friday morning, slipping by half a cent to trade at about $1.35, while UK government borrowing costs rose on the financial markets.
The OBR said the overshoot in the August data was mainly driven by upward revisions to estimates of local authority borrowing. In addition, VAT and other receipts were lower than expected last month.
The independent Treasury watchdog said it expected a lower level of borrowing in the second half of the financial year, amid predictions for a rise in capital gains tax receipts and lower levels of debt interest.
However, economists warned that a weak economic outlook, elevated borrowing costs and an expected downgrade in the OBR’s productivity forecasts would force Reeves to raise taxes or cut spending if she wanted to keep within her fiscal rules.
“Taxes will almost certainly need to rise if the fiscal rules are to be met,” said Matt Swannell, the chief economic adviser to the EY Item Club. “A combination of gilt market stress and reversals on welfare reform has used up the thin margin for error in the government’s current spending plans.”
The consultancy Capital Economics forecast the chancellor would need to raise about £28bn, mostly through higher taxes, if she wanted to maintain the £9.9bn buffer held against the fiscal rule at the spring statement.
James Murray, the chief secretary to the Treasury, said the government had a plan to bring down borrowing. “Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms, and putting more money in working people’s pockets,” he added.
The latest snapshot from the ONS showed the exchequer benefited from rising national insurance receipts, reflecting the chancellor’s £25bn increase in the rate paid by employers at her first autumn budget.
However, the increase was outstripped by higher spending on public services, benefits and debt interest.
Britain’s long-term borrowing costs have hit the highest level in 27 years, fuelled largely by global factors but also investor worries over the strength of the UK economy and the public finances.
The ONS said central government debt interest rose to £8.4bn in August, £1.9bn higher than in the same month a year earlier.
The figures come a day after the Bank of England kept interest rates unchanged at 4% and scaled back its multibillion-pound “quantitative tightening” plan to dispose of billions of pounds in UK government bonds.
The Bank disposed of £100bn last year through a mixture of sales and allowing maturing debt to expire. Economists warned this could contribute to the UK’s rising borrowing costs.
On Thursday the central bank said it would scale back its plan to £70bn for the year ahead. However, fewer bonds will mature in the next 12 months. As a result, the Bank is increasing its active sales to £21bn even though it has a lower target overall.
Mel Stride, the shadow chancellor, said: “Keir Starmer and Rachel Reeves are too weak and distracted to take the action needed to reduce the deficit. The chancellor has lost control of the public finances, and Labour’s weakness means much-needed welfare reforms have been abandoned.”
