UK public sector borrowing far exceeds forecast as spending rises

Between April and August 2025, the UK government’s public sector borrowing reached £83.8 billion, approximately £11.4 billion more than officials had forecast for that period, driven by elevated spending on public services, benefits, and interest payments, according to the Office for National Statistics. This poses a serious challenge for Chancellor Rachel Reeves ahead of the November budget.

In August alone, borrowing stood near £18 billion, exceeding expectations. Despite increased tax and National Insurance receipts, the shortfall reflects larger deficits from devolved administrations and weaker than expected VAT returns. Debt interest costs have also surged in line with inflation and rising gilt yields.

Economists are warning that the government may need to consider further tax or spending measures to meet its fiscal rules. In particular, meeting the requirement to balance day‑to‑day current spending with revenue over a five‑year period could force adjustments in either spending priorities or revenue generation. Some forecasts suggest tax rises in the region of £28–40 billion, though government ministers have pledged not to repeat the scale of tax increases seen in previous budgets.

The rise in borrowing has immediate market consequences. The pound fell on the currency markets on the back of the data, while government borrowing costs rose. Investors expressed concern about the sustainability of public finances, especially in the face of persistently high inflation and low productivity growth.

There is also tension between the need to maintain public services and the risk such borrowing entails for growth and inflation. With inflation running above target, large borrowing may exacerbate inflationary pressures, and excessive borrowing could lead to higher interest rates or lowered investor confidence. The government faces pressure to find a balance.

As the UK prepares for the November 26 budget, all eyes are on what measures Chancellor Reeves might propose. Analysts expect that may include changes to property tax, inheritance tax, or freezing personal tax bands. But there is concern that business investment and consumer sentiment could be harmed if tax burdens become too high or if spending cuts are poorly targeted.

This borrowing overrun reflects deeper economic pressures: rising energy costs, inflation affecting interest payments on government debt, and the lagged effects of earlier tax rises and regulatory costs. Meeting fiscal rules without derailing growth remains the key challenge.