UK borrowing surpassed official forecasts in August, reaching a debt-to-GDP ratio of 100%, according to data from the Office for National Statistics (ONS). This highlights significant fiscal challenges for the government.
Public sector net borrowing stood at £13.7 billion last month, significantly above the £11.2 billion forecast by the Office for Budget Responsibility (OBR). This increase was predominantly due to higher spending on benefits, which were adjusted in line with inflation, along with additional government operational expenses.
Despite the rise in borrowing, the cost of servicing the UK’s debt decreased for the fourth consecutive month, dropping by £100 million to £5.9 billion. This reduction is attributed to a decline in the retail price index measure of inflation. Moreover, tax receipts from VAT, income tax, and corporation tax saw an increase compared to the same period last year. Conversely, national insurance contributions fell following a rate cut by the previous government.
Labour has confirmed its commitment not to raise VAT, income tax, or corporation tax, which constitute the bulk of government revenue. Overall, borrowing has consistently exceeded expectations for three months, totalling £7 billion more than anticipated since the fiscal year commenced in April.
Labour, since assuming office in July, has identified a £22 billion fiscal shortfall left by the previous government. However, Chancellor Reeves received a £10 billion fiscal boost ahead of the autumn budget plans. This came after the Bank of England announced it would sell fewer government bonds back to the market, as part of its quantitative tightening strategy. According to Goldman Sachs, this reduction in bond sales could minimise the losses covered by Treasury cash transfers, providing additional fiscal headroom.
The persistent rise in UK borrowing and the resulting debt-to-GDP ratio of 100% signify substantial fiscal challenges. While Labour faces a notable fiscal gap, recent developments in the Bank of England’s bond strategy offer a measure of relief.