• Published

The government borrowed more than expected in August, as persistently higher inflation pushed up overall spending.

Borrowing - the difference between tax receipts and government spending - was £18.3bn in August, almost a fifth higher than the year before, the Office for National Statistics (ONS) said.

It means the government is borrowing more than official forecasters expected, adding to pressure on Chancellor John Healey as he prepares to deliver his first Budget on 28 October.

Inflation rose to its highest rate in five months in August in the UK, driven up by higher petrol and diesel prices.

Although tax receipts were higher in August compared with a year ago, spending on public services, benefits, and other costs grew more as the pace of price rises increased.

The interest the government is paying on its debt rose to £8.8bn, its highest August level since records began in 1997.

The Institute for Fiscal Studies (IFS) warned that spending on debt interest is "a worryingly large share of overall government spending and has been pushed up" since the last official forecasts from the Office for Budget Responsibility (OBR).

Research economist Nick Ridpath said: "Both higher borrowing costs and higher inflation make life harder for a chancellor who is looking to bring down borrowing and to spend more on government priorities."

And Ruth Gregory, deputy chief UK economist at Capital Economics, said it is a "dismal backdrop for the autumn Budget, with the government once again borrowing more than expected".

She said the figures raise the likelihood of many of Prime Minister Andy Burnham's policy ambitions being "reined in or delayed to avoid big tax hikes and/or a backlash in the markets".

Gregory also warned that, with the economy weakening, the government is likely to continue borrowing more than expected.

Emma Reynolds, chief secretary to the Treasury, said that the UK has "huge potential" for economic growth, but only with "fiscal discipline" from the government.

"At a time when debt interest costs billions of pounds that could otherwise be spent on improving lives, we must always know where the money is coming from to pay for public services," she said.

She added that the government is committed to its fiscal rules "with a buffer against uncertainty".

However, Conservative shadow chancellor Andrew Griffith said the Labour government had "lost control of the public finances" by overshooting the OBR's forecasts.

"Only the Conservatives will make the tough choices on welfare and public spending to get Britain's finances under control."

Martin Beck, chief economist at WPI Strategy, said it was important not to "overinterpret a single month given the volatility in the numbers", but added that there were some "concerning elements".

He said that a quarter of government debt is linked to inflation, and that the cost of paying that interest would be likely to rise over the coming months.

While the figures were an "unwelcome setback", he said the government tends to look at the OBR's medium-term fiscal forecast - so what it expects for the public finances three years into the future.

"But even there, the chancellor's got problems," he said. "The cost of that interest has gone up. That's going to feed through into more borrowing."

He added that the government is also under pressure to spend more on defence and cost-of-living support to households.

Economists think the chancellor may have to find £15bn, perhaps through tax rises, to do this and meet the government's self-imposed spending rules.

Inflation - the pace of price rises - has been above target, and putting pressure on the UK economy.

Consumer price inflation rose to its highest rate in five months in the year to August, running at 3.1%, pushed up in part by the fallout from the US-Israel war in Iran.