“Lost Control” – Surprise UK Budget Deficit Blowout Batters Sterling & Gilts

The fiscal farce in the UK went from bad to worse this morning as government borrowing came in significantly higher than forecast in August.

In yet another blow to Chancellor of the Exchequer Rachel Reeves – ahead of a challenging budget in the fall (autumn) – the deficit stood at £18 billion ($24.4 billion), the Office for National Statistics said Friday, well above the £12.5 billion the Office for Budget Responsibility had forecast and the highest borrowing for the month in five years…

Source: Bloomberg

As Bloomberg reports, this left the deficit after five months of the fiscal year at £83.8 billion – £11.4 billion above the OBR forecast and the second-highest since records began in 1993 after the pandemic in 2020. The deficit was £67.6 billion a year earlier.

Source: Bloomberg

The disappointing August figures were compounded by a series of revisions to the previous four months that added £5.9 billion to the deficit, much of it due to lower-than-previously-estimated VAT receipts and higher local-government spending and borrowing.

Reeves had looked on track this year with stronger tax receipts offsetting higher spending but the latest figures are a significant setback, underscoring the perilous state of the public finances and potentially further eroding the slim £9.9 billion headroom set aside against her main fiscal rule. 

The pound and gilts fell.

The yield on 10-year bonds rose two basis points to 4.70%, while the 30-year rate rose three basis points to 5.54%.

Source: Bloomberg

Sterling dropped as much as 0.5% to $1.3483, the lowest since Sept. 8.

Source: Bloomberg

“The chancellor has lost control of the public finances,” Mel Stride, the opposition Conservative shadow chancellor, said.

Reeves already faced a difficult budget on Nov. 26, when she is expected to announce billions of pounds of growth-sapping tax rises to offset higher borrowing costs, policy u-turns and an anticipated growth downgrade by the OBR.

James Murray, Chief Secretary to the Treasury, said the government “has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest.”

Bloomberg Economics reckons £35 billion is needed to plug the borrowing gap that has opened up since the March Spring Statement.