Government borrowing climbs in August as higher rates put pressure on UK debt-pile

·4 min read
The borrowing figures come ahead of chancellor Kwasi Kwarteng mini-Budget on Friday. Photo: Tejas Sandhu/SOPA Images/LightRocket via Getty
The borrowing figures come ahead of chancellor Kwasi Kwarteng mini-Budget on Friday. Photo: Tejas Sandhu/SOPA /LightRocket /Getty

Government borrowing climbed ahead of forecasts in August as interest payments on the UK’s debt-pile are rising due to soaring inflation.

Figures from the Office for National Statistics (ONS) show UK public sector net borrowing stood at £11.8bn ($13.4bn) last month, £5.8bn more than the Office for Budget Responsibility (OBR) expected in March.

The government borrowed £4.9bn in July, and monthly borrowing also overshot market forecasts by around 50%.

While borrowing in August was £2.6bn below levels from the same month last year, it represented a £6.5bn surge from pre-COVID levels in 2019, when it stood at £5.3bn, the ONS said.

But interest payments on national debt soared 22.1% as rocketing inflation drove debt-interest costs to £8.2bn – the highest for any August on record.

Public borrowing reached £58.2bn in the first five months of the financial year, a sum that's set to surge further as chancellor Kwasi Kwarteng prepares to unveil tax cuts and energy bills support in a mini-Budget on Friday.

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."

Read more: UK cuts business energy bills in half to stop firms collapsing

The OBR, commenting on the release said that the energy bill support measures have yet to have a "material effect" on the public finances.

"The May package has so far added £2.4bn to spending, with costs rising from October," the watchdog added. "This month’s much larger measures, including the energy price guarantee, will raise borrowing significantly through the second half of 2022-23."

Watch: What is a recession and how do we spot one?

The deterioration in the deficit comes amid concerns that prime minister Liz Truss will further stoke inflation and put more strain on public finances.

Truss has promised a multi-billion pound of tax giveaways in an effort to bolster growth.

Earlier this month she pledged further energy support by capping household bills at £2,500 per year for two years from October.

Read more: UK economy slows as demand falls in August

On Wednesday, business secretary Jacob Rees-Mogg unveiled a new package that slashes businesses's energy costs in half amid concerns the crisis could spark a wave of collapses.

The Department for Business, Energy and Industrial Strategy said that schools, charities, hospitals and other non-domestic organisations will be covered by the policy alongside businesses. The measures will last for six months.

Danni Hewson, financial analyst at AJ Bell, said: "Liz Truss has said growth will be the key that restarts the UK’s economic engine, which is widely thought to have stalled leaving the economy merrily sliding downhill for the last couple of months. But growth requires confidence, and the new chancellor will need to soothe investor’s nerves when he delivers his ‘mini budget’ later this week.

"Speculation that it won’t include an independent health check from the OBR has struck a discordant note. If the government is confident that it has got the right strategy it shouldn’t fear transparency.

"The government needs to outline exactly how it will pay for the extra spend that will be required over the next six to twelve months. It needs to prove to markets that the UK economy is in a position to borrow more money because it has the capacity to move on from this current crisis and thrive."