New Chancellor Kwasi Kwarteng has been dealt a blow ahead of his mini-Budget as official figures revealed higher-than-expected government borrowing last month as its debt interest bill soared to an August record.
The Office for National Statistics (ONS) said soaring inflation saw the interest on government debt jump by 22% year-on-year to £8.2 billion last month – the highest August figure since monthly records began in April 1997.
Government borrowing, excluding state-owned banks, hit £11.8 billion in August – £2.6 billion below the same month last year, but far higher than the £6.5 billion expected by most economists and nearly double the £6 billion predicted by fiscal watchdog the Office for Budget Responsibility (OBR).
The figure also represented a £6.5 billion surge from pre-pandemic levels in 2019, when it was £5.3 billion.
The Chancellor is preparing to unveil an emergency mini-Budget on Friday as the Government under new Prime Minister Liz Truss looks to head off a recession due to the cost-of-living crisis.
In response to the borrowing figures, Mr Kwarteng said: “Our priority is to grow the economy and improve living standards for everyone – with strong economic growth and sustainable public finances going hand in hand.
“As Chancellor, I have pledged to get debt down in the medium term.
“However, in the face of a major economic shock, it is absolutely right that the Government takes action now to help families and businesses, just as we did during the pandemic.”
The Government has already said it will fund its energy bill freeze by piling on more government debt, while it is also feared the hefty tax cuts expected on Friday will leave the public finances in a desperate state.
The ONS said government spending in August remained largely unchanged at £73.2 billion last month compared with a year earlier, although it was higher than forecast.
Debt interest payments linked to Retail Prices Index (RPI) inflation were also far higher than predicted and now stand at £49 billion in the financial year to date – 65% up year-on-year.
Public sector net debt, excluding state-owned banks, was £2.4 trillion at the end of August, or around 96.6% of gross domestic product (GDP) – an increase of £195.2 billion year-on-year.
But in a glimmer of good news on borrowing, the figures showed the economic slowdown across the UK did not impact central government receipts, which were up £5.6 billion year-on-year to £69.6 billion in August thanks to a £3.9 billion rise in tax receipts to £51.4 billion.
Revisions to data also left year-to-date government borrowing in line with the OBR forecast, at £58.2 billion – £21.4 billion less than in the same period last year.
Martin Beck, chief economic adviser to the EY Item Club, said: “Borrowing will rise over the second half of the fiscal year as the majority of support to help households and businesses pay their energy bills takes effect.
“There is a wide range of potential borrowing outcomes, partly because the cost of the household scheme will depend on the level of wholesale energy prices but also due to the extent of support for businesses still being unclear.
“Tax cuts will add to borrowing, but reducing the extent to which the tax burden is forecast to grow should support activity and may boost the economy’s growth potential.”