UK government borrowing rose to £18.3 billion ($24.4 billion) last August, exceeding forecasts and adding to pressure on Prime Minister Andy Burnham and Chancellor John Healey ahead of the budget announcement in October.
Inflation and debt interest drive up spending
The gap between government spending and revenue in August was about £3.5 million ($4.7 billion) above the figure forecast by the Office for Budget Responsibility, requiring increased borrowing. The rise in spending was mainly driven by higher inflation and the resulting increase in the costs of public bodies.
Disruption to shipping through the Strait of Hormuz during the Iran war, through which about 20% of global oil and liquefied natural gas supplies passed before the war, led to a sustained rise in petrol, diesel and electricity prices. This pushed inflation in Britain to about 3.1% year on year last August, according to data from the Office for National Statistics.
Higher yields on government bonds used to finance public borrowing also increased spending, after Britain's public debt exceeded £3 trillion ($4 trillion).
Tax rises expected
Thomas Pugh, chief economist at consultancy RSM, said tax rises had become unavoidable after the sharp increase in UK government borrowing, adding that the next budget would be much more difficult than Burnham had expected before becoming prime minister.
Debt-interest spending now represents “a large and worrying share of total government spending.”
Redpath added that rising borrowing costs and accelerating inflation were making Chancellor John Healey's task more difficult as he seeks to reduce borrowing and increase spending on government priorities.
Tax revenues fail to keep pace with higher spending
Receipts from income tax, capital-gains tax and social-insurance contributions reached £231 billion ($308 billion) in the year to last August, an increase of £16.6 billion (approximately $22 billion) from the same period.
But the increase in tax receipts was not enough to offset the jump in public spending caused by inflation and higher debt-interest costs, prompting the government to borrow more than forecast by the Office for Budget Responsibility.
Andrew Griffith, the Conservative Party's Treasury spokesman, criticised the Labour government’s management of the public finances, saying taxes in Britain had reached record levels while government borrowing was rising.
Right-wing parties, including the Conservatives and Reform, are calling for cuts to welfare programmes to curb government spending, while opposing higher taxes on companies amid weak growth in the British economy.
