Economy

UK borrows almost twice as much as expected in August | Government borrowing

The UK government borrowed £11.8bn last month, almost twice as much as independent forecasters had expected, as high inflation pushed interest payments to an August record.

The figures from the Office for National Statistics provide a difficult backdrop for the chancellor, Kwasi Kwarteng, before his mini-budget this Friday to address the cost of living crisis.

Government borrowing was £2.6bn less than in August 2021 but £6.5bn more than the same month in 2019 before the coronavirus pandemic.

The £11.8bn figure was almost double the £6bn predicted in March by the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, mainly because of an increase in government spending. It was also higher than the £8.8bn forecast by City economists.

The government spent more on debt interest as well as social benefits because of the payment of cost of living grants to low-income households.

Debt interest payable by the central government rose to £8.2bn last month, the highest figure for August since records began in 1997, because of the effect of high inflation, as measured by the retail prices index, on UK government bonds.

Speaking before an anticipated announcement of an energy support package for businesses on Wednesday morning, 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 business secretary, Jacob Rees-Mogg, is expected to announce a cap on energy prices for businesses that would cut the rates they pay by up to half this winter. The new prime minister, Liz Truss, has already announced that households’ energy bills will be capped for the next two winters at £2,500 for the average home, after prices soared, as a result of Russia’s war in Ukraine.

The government’s tax take increased last month, pushing its receipts to almost £70bn, up £5.6bn compared with August last year but slightly below the OBR’s forecast.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said total borrowing this year “will be far higher, due to the new government’s fiscal activism. Admittedly, the loans to energy suppliers to facilitate the price freeze at £2,500 for the average household probably will boost debt but not borrowing, as they will be considered a financial transaction, involving the state acquiring an asset.”

The government is expected to set out its measures to help households on Friday in its mini-budget. Tombs added: “The real uncertainty surrounds whether the government will attempt to cut spending in order to part-fund these tax cuts, but with departments’ expenditure coming under pressure from rising wages and energy costs, the scope for efficiency savings is modest.”

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