Business
Government borrowing hits highest August level for five years
Charlotte EdwardsBusiness reporter
Getty ImagesUK government borrowing in August hit the highest level for the month in five years, latest figures show, adding to the pressure on the chancellor ahead of the Budget.
Borrowing – the difference between public spending and tax income – was £18bn in August, the Office for National Statistics (ONS) said, which was higher than analysts had expected.
Despite tax and National Insurance receipts increasing, they were outstripped by higher spending on public services, benefits and debt interest, the UK statistics body said.
One analyst said Rachel Reeves faced “tough choices” in the Budget to meet her tax and spending rules, with speculation building that taxes will rise.
The latest borrowing figure for August is the highest for the month since the height of the Covid pandemic, when government spending was ramped up to support the economy.
Borrowing over the first five months of the financial year has now reached £83.8bn, which is £16.2bn higher than the same period last year.
It is also above the prediction of £72.4bn that the government’s official forecaster, the Office for Budget Responsibility, had made in March.
Paul Dales, chief UK economist at Capital Economics, said the latest figures, “highlight the deteriorating nature of the public finances even though the economy hasn’t been terribly weak”.
He added that this would contribute to the chancellor having to find money in November’s Budget, “mostly through higher taxes”.
Nabil Taleb, an economist at PwC UK, said Reeves now faced “tough choices, and the test will be whether she can make them palatable to voters and markets”.
The expectation is Reeves will need to raise extra money or cut spending to meet her self-imposed rules for government finances.
Reeves has two main rules, which she has said are “non-negotiable”:
- Not to borrow to fund day-to-day public spending by the end of this parliament
- To get government debt falling as a share of national income by the end of this parliament in 2029/30.
There has been a wide range of forecasts for how much money Reeves might raise in the Budget to meet her rules.
One factor that will influence this is the latest growth forecast from the Office for Budget Responsibility (OBR). Small changes to the forecaster’s outlook can make a big difference to its projections for tax income over the years ahead.
The cost to the government through its U-turns on benefit cuts – which had aimed to save billions of pounds – will also be a factor, as will the interest rates on government borrowing.
Mr Dales at Capital Economics said the chancellor would have “to raise £28bn, mostly through higher taxes, if she wants to keep her buffer against her rule of £10bn”.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said the latest figures suggested “the chancellor will need to raise taxes by more than the £20bn we had previously estimated”.
“We still expect the chancellor to fill the fiscal hole with a smorgasbord of stealth and sin tax increases, along with some smaller spending cuts.”
On the financial markets, the value of the pound fell 0.5% against the dollar to $1.349, while government bond yields – which indicate government borrowing costs – rose on Friday.
The latest ONS figures showed interest payments on government debt rose by £1.9bn to £8.4bn, partly due to inflation pushing up costs.
Welfare spending increased by £1.1bn to £27.3bn, largely driven by inflation-linked benefit rises and higher state pension payments.
James Murray, Chief Secretary to the Treasury, said the government had “a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest”.
“Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms, and putting more money in working people’s pockets,” he added.
But shadow chancellor Sir Mel Stride, wrote on X: “Keir Starmer and Rachel Reeves are too weak and distracted to take the action needed to reduce the deficit.
“The chancellor has lost control of the public finances, and Labour’s weakness means much needed welfare reforms have been abandoned.”
Warm weather boosts stores
Separate data from the ONS showed that good weather brought a boost to the High Street in August.
Retail sales rose by 0.5% during the month, slightly higher than analysts had expected, with butchers, bakers, clothing stores and online shopping all reporting growth.
The figures come despite warnings from some retailers in recent days of cost pressures and price rises.
However, the monthly shop sales data from the ONS can be volatile.
Over the three months to August sales declined by 0.1%, the ONS said, compared with the three months to May.
“Overall, August caps off a better-than-expected summer, particularly for non-food retailers, with sales of seasonal lines boosted by the hottest summer temperatures on record,” said Jacqueline Windsor, head of retail at PwC.
“However, overall sales volumes remain below pre-pandemic levels, so the high street is far from being out of the woods.”
Alice Cowley, managing director in Accenture’s retail practice, said retailers were “facing fresh headwinds as we head into the autumn”.
She said factors such as uncertainty over possible Budget measures, and ongoing energy and labour cost pressures, would continue to put profit margins “under greater strain”.
The FTSE 100 closed higher on Monday, recouping most of Friday’s hefty falls amid a calmer bond market and as Iran responded to the latest US peace proposal.
The FTSE 100 closed up 128.38 points, 1.3%, at 10,323.75. The FTSE 250 ended up 15.56 points, 0.1%, at 22,611.70, but the AIM All-Share fell 8.72 points, 1.1%, at 800.17.
Iran said it had responded to a new US proposal aimed at ending the war, adding that diplomatic exchanges continue despite Iranian media reports describing Washington’s demands as excessive, AFP reported.
Washington and Tehran have been swapping proposals in an effort to end the conflict, which the US and Israel launched on February 28, but they have held only a single round of talks despite a fragile ceasefire.
“As we announced yesterday, our concerns were conveyed to the American side,” foreign ministry spokesman Esmaeil Baqaei told a news briefing, adding that exchanges were “continuing through the Pakistani mediator”.
Mr Baqaei defended Iran’s demands, including the release of Iranian assets frozen abroad and the lifting of long-standing sanctions.
“The points raised are Iranian demands that have been firmly defended by the Iranian negotiating team in every round of negotiations,” he said.
But with no signs of clear progress, the oil price remained inflated and volatile.
Brent crude for July delivery was trading at 110.80 dollars a barrel on Monday, up compared to 108.83 at the time of the equities close in London on Friday.
After a frantic Friday, the bond markets calmed, while sterling also rebounded as investors weighed the latest political developments.
The yield on UK 10-year gilts traded at 5.14% compared to 5.17% at the same time on Friday.
The pound traded at 1.3397 dollars on Monday afternoon, up from 1.3319 on Friday. Against the euro, sterling firmed to 1.1506 euros from 1.1462 on Friday.
Prime Minister Sir Keir Starmer insisted he would not set out a timetable to leave No 10 as potential leadership challenger Andy Burnham vowed to “change Labour” if he is successful in his effort to return to Parliament.
The Prime Minister said he still wants to lead Labour into the next general election amid calls from within the party to set out a timetable for his exit.
Greater Manchester Mayor Mr Burnham hopes to be Labour’s candidate in the Makerfield by-election, which could provide him with a route back to the Commons to challenge for the party leadership and the keys to Downing Street.
Speaking to broadcasters in London, Sir Keir said he was not going to set out a timetable to stand down if Mr Burnham returns to Westminster.
He added: “I do want to fight the next election. Obviously, I recognise that after the local election results, the elections in Wales and Scotland as well, that the first task is obviously turning things around and making sure that my focus is in the right place.”
Meanwhile, the International Monetary Fund said growth in the UK economy will be stronger this year than previously thought.
The IMF updated its growth projections a month after warning of a sharp slowdown caused by the global energy shock from the US-Iran war.
The influential financial body said it was now predicting UK gross domestic product to rise by 1% in 2026, higher than the 0.8% growth it was forecasting last month.
Responding to the latest report, Chancellor Rachel Reeves said: “The IMF upgrading its growth forecasts and backing our fiscal strategy is yet more proof that this Government has the right economic plan.”
In Europe, equity markets on Monday, the Cac 40 in Paris ended up 0.4%, and the Dax 40 in Frankfurt advanced 1.5%.
In New York, the Dow Jones Industrial Average was down 0.1%, the S&P 500 fell 0.4%, and the Nasdaq Composite was 0.7% lower.
On the FTSE 100, Whitbread closed up 2.3% after Corvex Management urged the Premier Inn owner to put itself up for sale, slamming its recently announced new five-year strategic plan.
In a damning letter to Whitbread management, the New York-based activist hedge fund called the status quo “untenable” and said that the need to pursue “meaningful strategic and structural reform had become unignorable”.
As a result, Corvex, which holds a stake of around 7% in Whitbread, said the only “credible” path to unlocking value at Whitbread is a sale of the company.
Anglo America fell 1.4% as it struck a deal to sell its portfolio of steelmaking coal mines in Australia to Dhilmar for up to 3.88 billion dollars in cash.
The London-based mining house said Dhilmar will pay the FTSE 100-listing 2.3 billion dollars upfront, and the deal has a price-linked earnout of up to 1.58 billion dollars.
Anglo American chief executive officer Duncan Wanblad said: “This agreement represents another major step in the simplification of our portfolio ahead of completing our merger with Teck. Through this transaction, we will complete our exit from steelmaking coal.”
Susannah Streeter, chief investment strategist at Wealth Club, said: “This not only strengthens the balance sheet, ahead of its planned merger with Canada’s Teck Resources, but also keeps it exposed to future strength in coal prices.”
Capita shares rose 8.9% as the London-based outsourcing and business services company said adjusted revenue rose 2.9% on-year in the first four months of 2026, which it said was in line with expectations.
Looking ahead, Capita said it continues to expect a low to mid-single digit revenue climb in Capita Public Service and expects mid-teen revenue growth in its Pension Solutions business.
The biggest risers on the FTSE 100 were Centrica, up 7.70p at 196.95p, National Grid, up 43.50p at 1,231.50p, Pearson, up 37.00p at 1,136.50p, Relx, up 81.00p at 2,504.00p, and SSE, up 74.00p at 2,345.00p.
The biggest fallers on the FTSE 100 were 3i Group, down 128.00p at 2,082.00p, Airtel Africa, down 15.60p at 312.80p, Mondi, down 16.40p at 734.60p, Polar Capital Technology Trust, down 12.50p at 659.00p and Diploma, down 95.00p at 6,625.00p.
Tuesday’s global economic calendar has UK consumer and wholesale inflation figures, eurozone inflation data and the minutes of the last Federal Open Market Committee meeting.
Tuesday’s local corporate calendar has full-year results from business services group DCC, half-year numbers from supplier of specialised technical products and services, Doploma, and electricals retailer Currys.
The Reserve Bank of India (RBI) on Monday decided against activating the countercyclical capital buffer (CCyB), indicating that current financial and credit conditions do not warrant an additional capital requirement for banks, PTI reported.The central bank said the decision followed a review and empirical assessment of indicators used under the CCyB framework.“Based on review and empirical analysis of CCyB indicators, it has been decided that it is not necessary to activate CCyB at this point in time,” RBI said in a statement.Under the RBI (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025, the CCyB framework is activated when financial conditions indicate rising systemic risks linked to excessive credit growth.The framework primarily relies on the credit-to-GDP gap as a key indicator, along with supplementary metrics.According to the RBI, the CCyB mechanism is intended to serve two broad objectives.Firstly, it requires a bank to build up a buffer of capital in good times, which may be used to maintain the flow of credit to the real sector in difficult times.Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.The framework was introduced globally after the 2008 financial crisis as part of measures proposed by the Group of Central Bank Governors and Heads of Supervision (GHOS) under the Basel framework to strengthen financial system resilience.
The company has announced plans to build seven new models in Europe including a small electric hatchback.
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