UK borrowing jumps to £18B in August

The UK government’s borrowing exceeded expectations last month. The Office for National Statistics (ONS)’s official data put the country’s net borrowing at £18 billion for the month, £3.5 billion more than the same period last year.

The latest figures also topped both City and Office for Budget Responsibility (OBR) forecasts, which were at £12.75 billion and £12.5 billion respectively. However, as a result, Chancellor Rachel Reeves is facing pressure to announce tax hikes in November to close a gap that could reach £40 billion.

Fitzner stated that their spending on public services surpassed the rise in tax income

The Office for Budget Responsibility had pencilled £72.4 billion of borrowing for the year’s first five months. However, the UK public sector’s borrowing totaled £83.4 billion over the period, the biggest sum since the pandemic’s early days. August borrowing figures only deepen the strain on the country’s Treasury. Not to mention Chancellor Rachel Reeves still faces the delicate task of restoring public finances without stifling growth. 

ONS chief economist Grant Fitzner noted that spending on public services and debt interest in August outweighed the boost from higher tax revenues, including employer national insurance contributions.

By popular demand, the chancellor must close the more than £20 billion gap to keep the government on track to balance day-to-day spending with tax revenues by 2029-30. The OBR has even reportedly warned her that it will lower its productivity outlook before the Budget, making additional tax increases more likely. A day before the August figures were released, the Bank of England paused its interest rate cycle, keeping the base rate at 4%.

The UK’s long-term government bonds had jumped nearly 6% in August

In late August, the UK government also revealed that the interest rate on 30-year government bonds had surged to 5.72%. At the time, the rise in UK borrowing costs mirrored moves across Europe, where 30-year German, French, and Dutch yields hit their highest point in more than a decade. Long-term treasury yields in the US also climbed to higher levels. 

Government debt costs have risen globally amid heightened geopolitical tensions, US trade policies under Donald Trump, and France’s political turmoil. In an auction done in August, however, the UK Debt Management Office sold a record £14 billion of 10-year bonds after investors placed £141 billion in bids at an August auction, signaling robust demand for shorter maturities. 

Still, some analysts caution that elevated inflation could persist, diminishing the real returns on UK holdings. Catherine Mann, a Bank of England’s interest rate-setting committee member, even claimed policymakers were downplaying the risk of persistent inflation. She advocated that the BoE keep interest rates high to reduce inflationary pressures and then slashed sharply to jump-start growth.

Chadha, a former head of the National Institute of Economic and Social Research, argued that the UK government was in a precarious position and thus could be forced to approach the IMF if hit by a global downturn. 

He commented, “The backdrop is a lack of control over public debt, high debt service costs because our borrowing rates are high, and a dwindling demand to lend to the UK. This would most likely manifest as a failure in a debt management office (DMO) auction and a freezing of our debt markets.”

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