John Healey autumn Budget under pressure as August borrowing hits near-record high

Government borrowing in August reached £18.3 billion, the second-highest figure for the month since records began, putting fresh pressure on Chancellor John Healey ahead of the John Healey autumn Budget and casting doubt over how much financial room he has left to manoeuvre.

Public sector net borrowing measures the gap between what the Government spends and what it collects through taxes and other income. The August figure came in £3.5 billion above what official forecasters had expected, and was £2.9 billion, or 19%, higher than in the same month last year, according to the Office for National Statistics (ONS). The only August on record with higher borrowing was 2020.

What drove the August borrowing rise?

The ONS said the increase was driven by Government spending rising faster than income from taxes and other receipts. Inflation-related costs played a part, as did spending on the state pension and other benefits.

Central Government also paid £8.8 billion in interest on its debts during August, the highest figure for the month since records began. A key reason for that is the way interest on Retail Prices Index (RPI)-linked Government bonds, known as gilts, moves with inflation. When inflation rises, so do the payments, making the overall cost more volatile from month to month.

Since April, the start of the financial year, the Government has borrowed a total of £77.3 billion. That is £2.2 billion less than over the same period last year, but £8.1 billion more than the Office for Budget Responsibility’s (OBR’s) forecast published in March.

John Healey autumn Budget: how tight is the headroom?

The figures arrive roughly a month before the Chancellor is due to deliver his first autumn Budget statement in October, and analysts are drawing stark conclusions about the space he has to work with.

Economists at KPMG predicted that rising borrowing costs following the Middle East conflict had already cut about £9 billion from the Chancellor’s fiscal headroom. Coupled with sluggish economic growth, they said this could leave him with a buffer of about £12 billion in the autumn.

That figure has since come under further scrutiny. According to GB News, KPMG’s latest economic outlook projects that headroom will shrink to roughly £12 billion by the autumn, down sharply from the £23.6 billion available when the spring forecast was published.

The picture may be even tighter than that. According to Yahoo Finance, reporting on analysis by The Telegraph, Mr Healey could be left with fiscal headroom of just £8.5 billion unless he brings forward new tax and spending measures to restore the previous buffer.

Longer-term risks are also in view. City A.M. reports that if the war in Iran drags on until the middle of next year, economists warn that the headroom could be entirely wiped out, with a further £18 billion potentially slashed from the fiscal forecast.

Thomas Pugh, chief economist at RSM UK, said the August borrowing figures set the stage for a Budget that is likely to be far more difficult than either the Chancellor or Prime Minister anticipated when they came to power. ‘Another round of tax rises in October now looks inevitable,’ he said. Mr Pugh estimated the Chancellor’s fiscal headroom will be between £10 billion and £15 billion, less than the £24 billion left by his predecessor Rachel Reeves. ‘As long as the headroom is in double figures he will probably be able to avoid topping it up, but the drop means any additional day-to-day spending, such as on defence or cost of living, will have to be paid for by higher taxes,’ he added.

Matt Swannell, chief economic adviser to the Item Club, said the Prime Minister had previously hinted at measures to ease the cost of living, but that the latest rise in Government borrowing costs limits the scope for significant support. ‘Instead, the Chancellor may have to announce modest fiscal tightening to preserve a tolerable margin for error against the fiscal rules,’ he said.

Emma Reynolds, the Chief Secretary to the Treasury, acknowledged the pressures while defending the Government’s approach. ‘At a time when debt interest costs billions of pounds that could otherwise be spent on improving lives, we must always know where the money is coming from to pay for public services,’ she said, adding that the Government remained ‘committed to meeting our fiscal rules with a buffer against uncertainty.’

Andrew Griffith, shadow chancellor for the Conservatives, said the Government had ‘lost control of the public finances’, pointing to the £8 billion overshoot against the OBR’s forecast. ‘It takes a rare fiscal incontinence to both have the highest tax take in history and see borrowing still shoot up,’ he said.

The Chancellor’s October Budget statement will be the first concrete test of how he intends to close the gap between the forecasts and the reality the ONS figures are now making plain.