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Higher-than-anticipated borrowing in August led public sector net debt to reach 100% of GDP, according to official figures released on Friday.
The Office for National Statistics reported that public sector borrowing, the gap between spending and tax revenue, amounted to £13.7 billion in August. This figure was £3.3 billion higher than in August 2023 and marked the third-highest borrowing level for the month since records began in January 1993. When excluding pandemic-related impacts, it represented the highest borrowing figure for August on record.
This borrowing level also exceeded the forecast of £11.2 billion set by the Office for Budget Responsibility, the fiscal oversight body. Since the start of the financial year in April, total borrowing reached £64 billion, surpassing the March forecast by £6.2 billion.
While central government tax receipts increased significantly in August, National Insurance contributions declined due to previously announced rate reductions, and benefits rose in line with inflation. Inflationary pressures also contributed to rising operational costs for public services.
As a result, public sector net debt (excluding public sector banks) was provisionally estimated at approximately £2.768 trillion. This figure represented a 4.3 percentage point increase compared to August 2023, indicating debt levels not seen since the early 1960s.
These figures present a challenging landscape for the new chancellor, Rachel Reeves, who is preparing for her first Budget next month. Prime Minister Keir Starmer has already indicated that the upcoming Budget may be "painful" due to a significant shortfall identified in public finances.
Darren Jones, chief secretary to the Treasury, stated that the administration inherited an economy not functioning effectively for many citizens and emphasized the need for tough decisions to stabilize the economic foundation.
Matt Swannell, chief economic advisor to the EY Item Club, noted that as the fiscal year approaches its midpoint, the UK’s fiscal situation remains difficult. Treasury analysis suggests that conditions may worsen in the months ahead. The upcoming Budget is likely to include adjustments to fiscal rules and potential tax increases beyond those previously outlined during the general election campaign. A substantial rise in taxes, coupled with diminishing economic momentum, may lead the Monetary Policy Committee to consider further interest rate cuts by year-end.
