Government borrowing rose in August to its highest monthly level since the 2021 coronavirus pandemic.
Official figures showed borrowing – the difference between spending and tax revenue – reached £13.7bn last month, up £3.3bn from August last year.
The Office for National Statistics (ONS) said tax revenues had grown “strongly” but were offset by some benefit increases and higher spending on public services, including workers’ wages.
The figures were released as the government prepares its end-October budget, which Prime Minister Sir Keir Starmer warned would be “painful”.
The government has acknowledged Some taxes will have to increase But it said it would stick to its manifesto commitment not to impose additional burdens on “working people” such as increases in VAT, national insurance or income tax.
Public borrowing in the first five months of the financial year reached £64.1 billion, about £6 billion higher than forecast by the Office for Budget Responsibility (OBR), which monitors the UK government’s spending plans and performance.
The increase in borrowing in August meant that the national debt rose to 100% of Britain’s annual economic output – its highest level since the early 1960s.
“There are only four answers to the problem of high debt – three bad answers and one good answer, and the good answer is economic growth,” Mohamed El-Erian, chief economic adviser at asset manager Allianz, told the BBC.
“The alternatives tend to be more painful in both the short and long term, so economic growth remains a mandate.”
The latest data showed that the UK economy failed to grow in July, which is a blow to the new government which has made boosting the economy one of its top priorities.
The Bank of England also cut its economic growth forecast for July-September to 0.3% from 0.4%.
Darren Jones, chief secretary to the Treasury, said the state of the public finances meant Labour “must take the tough decisions now to strengthen our economic foundations so that we can rebuild Britain and make life better for everyone in our country”.
The UK government claims that the public finances face a £22bn “black hole” this year, but around £9bn of that shortfall stems from the decision by Chancellor Rachel Reeves to award a public sector pay deal above the rate of inflation.
Speculation has been growing about whether Reeves will adjust the debt targets she has pledged to uphold under the fiscal rule.
Most rich-world governments set their own fiscal rules to maintain credibility in financial markets. The British government has a rule to manage its borrowing over five years.
But the UK could change that policy to give it more flexibility over its tax and spending plans – and the chancellor has so far refused to rule out changing those policies.
Plans announced by the Bank of England on Thursday to sell government debt, or bonds, could help Reeves because the impact of those bonds could be recorded in official economic forecasts.
PricewaterhouseCoopers economist Nikhil Golasuri said the August public finance data highlighted the “challenges” facing the government ahead of the budget on October 30.
But he added that one option for Labor would be to “change the fiscal rules” to ease some of the pressure, such as changing the number of years over which debt as a share of the economy should fall.
Income tax revenues were boosted in August by a large number of overdue self-assessment payments.
But the ONS said the increase in welfare payments was mainly due to spending rising in line with inflation. Spending on a number of benefits, including care allowance and disability living allowance, increased.
It added that inflation had also pushed up the cost of running public services.
