Government borrowing in August highest since Covid

Government borrowing in August rose to the highest level for the month since the Covid pandemic in 2021.

Official figures show that borrowing - the difference between spending and tax revenue - reached £13.7bn last month, £3.3bn more than in August last year.

The Office for National Statistics (ONS) said that tax income "grew strongly" but this was outweighed by some benefits being increased and higher spending on public services, including workers pay.

The figures are released as the government prepares for the Budget at the end of October, which Prime Minister Sir Keir Starmer has warned will be "painful".

The government has admitted that some taxes will have to rise but said it will stick to its manifesto promise not to increase the burden on "working people" such as increasing VAT, national insurance or income tax.

Public borrowing for the first five months of the financial year reached £64.1bn, some £6bn more than forecasts by the Office for Budget Responsibility (OBR), which monitors the UK government's spending plans and performance.

Increased borrowing in August means that national debt rose to 100% of the UK's annual economic output - a level last seen in the early 1960s.

"There are only four answers to high debt - three are bad answers, one is good and the good one is economic growth," Mohamed El-Erian, chief economic advisor at asset manager Allianz told the BBC.

"The alternatives tend to be much more painful short-term and long-term so economic growth has to remain a mission."

Latest figures showed the UK economy failed to grow in July, a blow for the new government, which has put boosting the economy as one of its key priorities.

The Bank of England has also revised down how much it expects the economy to grow between July and September to 0.3% from 0.4%.

Darren Jones, chief secretary to the Treasury, said the shape of the public finances meant Labour was "taking the tough decisions now to fix the foundations of our economy, so we can rebuild Britain and make every part of the country better off".

The government has claimed it faces a £22bn "black hole" in the public finances this year, but about £9bn of that reflects Chancellor Rachel Reeves's decision to award above-inflation public sector pay deals.

Speculation is building over whether Reeves might tweak the debt targets she has pledged to stick by under her fiscal rules.

Fiscal rules are self-imposed by most governments in wealthy nations which are designed to maintain credibility with financial markets. The UK government has a rule to manage its borrowing within a five-year time-frame.

But it could change this to give itself more flexibility over tax and spending plans. The chancellor has so far refused to rule out altering them.

Reeves potentially received some help from plans unveiled on Thursday by the Bank of England to sell government debt, or bonds - due to the way the impact of those may be recorded in official economic forecasts.

Gora Suri, economist at accountancy firm PwC, said August's public finance figures highlighted the "challenging" position facing the government ahead of the Budget on 30 October.

But he added an option for Labour would be "to tinker with the fiscal rules" to take some pressure off, such as changing the number of years debt as a share of the economy should be falling by.

In August, a rush of late self-assessment payments boosted income tax receipts.

But the ONS said higher benefits spending was largely due to payments being increased in line with inflation. A number increased including the carer's allowance and the disability living allowance.

Inflation also pushed up running costs for public services, it added.