UK borrowing rises above forecasts in August

The immediate pressure point is inflation, which is lifting the cost of public services, welfare payments and debt interest at the same time that the government is trying to push through a broad spending agenda that includes defence, housing, social care and devolution. Tax receipts were £1.1 billion ahead of the OBR’s forecast over the period, but that was more than offset by spending running £7.4 billion above plan, including £2.4 billion in welfare costs and £2 billion in higher debt interest. The state’s bill for servicing the debt came to £8.8 billion in August and the ONS said it is likely to top £10 billion in both September and October.

For investors, the key issue is not just the headline borrowing number but the trajectory of gilt supply and the credibility of the fiscal framework. The 10-year gilt yield rose as much as three basis points to 5.24% after the data, moving with a broader rise in global bond yields, while sterling was little changed at about $1.3370. That muted currency reaction suggests markets are not yet pricing a full-blown fiscal event, but they are clearly unwilling to grant the government much benefit of the doubt.

The data also point to a more structural problem: Britain’s debt stock is now just below £3 trillion, or 93.8% of GDP, close to the highest level since the 1960s. In that context, higher inflation is not a temporary nuisance for the Treasury; it is mechanically pushing up indexed spending and refinancing costs, making every incremental rate move more painful for the budget. The state’s main deficit measure was £51.9 billion in the period, £4.8 billion worse than forecast, while net investment also ran ahead of plan.

That leaves Burnham facing a narrower set of choices at the October 28 budget. The government can either rein in its ambitions, cut spending elsewhere, or raise taxes to restore headroom under its fiscal rule. Each option carries political cost. For bondholders, the near-term watchpoint is whether the budget delivers enough restraint to prevent another rise in long-dated gilt yields. For equity investors, the risk is that heavier taxation or weaker growth-friendly spending weighs on domestic demand, even as infrastructure, housing and defence-related sectors may still benefit from targeted fiscal support.

The next ONS update before the budget will matter because it will show whether August was an outlier or the start of a more damaging deterioration. If borrowing keeps running ahead of forecast and debt interest stays elevated, the government will have less scope to cushion households from surging energy bills without unsettling markets further.