UK government borrowing exceeds forecasts amid rising inflation and debt interest costs

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, piling 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".