- UK government borrowing was higher than expected in July
- The data is released amidst news that Prime Minister Andy Burnham plans a £20BN tax give away.
- Pound sterling faces significant risks if the market judges that Burnham's fiscal plans are not credible.
Picture by Simon Dawson / No 10 Downing Street
A difficult Autumn budget for the British pound awaits as Prime Minister Andy Burnham contends with above-forecast borrowing and a desire to slash taxes.
There's a whiff of Truss in the air this Tuesday: the Prime Minister of Great Britain is considering slashing taxes for all workers and business owners, while it's revealed the government borrowed more than was expected in July.
It is reported that Andy Burnham wants to increase the income tax personal allowance, which would cost £20BN, reports the Times.
To pay for it he will raise the Capital Gains Tax rate to equal that of income tax. The only question of relevance at this point is whether it will raise £20BN? Burnham thinks so, HMRC doesn't.
In fact, HMRC's own calculations from September 2024 suggested that raising the higher CGT rate by 10 percentage points would actually lead to a £2.025BN decrease in revenue by 2027-28.
Burnham wants to raise the threshold that all people pay tax to £15,570, just below where it would have been had it not been frozen since 2021. Interestingly, that means the state pension no longer falls into the taxable amount.
The move effectively shrinks Britain's tax base further, ensuring an increased reliance on fewer taxpayers.
So that's the political context as we approach the important budget: a Treasury kite-flying policy that will give away cash.
Now for the fiscal context: the government is borrowing more than anticipated.
New data from the ONS showed public sector net borrowing came in at £18.3BN in August 2026, £2.9BN higher than a year earlier and £3.5BN above the OBR forecast, making it the second-highest August on record.
Borrowing in the current financial year to date was around 2.7% lower than at the same point last year, however, it remained £8.1BN above the OBR’s forecast.
Debt interest payments reached £8.8bn in August, £0.7BN higher than a year earlier and the highest recorded for any August.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
Rising debt servicing costs reflect a rise in borrowing costs: long-dated gilt yields recently reached their highest level in decades, raising the cost of long-term financing.
The fiscal room Burnham is playing with is already tight, and he must demonstrate that his plans will reduce the day-to-day deficit by the start of the next decade (the fiscal rule), and he must create a fiscal buffer of billions of pounds in his budget to deliver that.
However, the rising cost of borrowing means that buffer has almost been wiped out.
Yet, he is considering a £20BN tax giveaway, funded by a tax that could cost the Treasury.
The dynamics are not encouraging.
For the pound, there's a big risk that Burnham pursues policies that deliver a clearly unsustainable fiscal arithmetic.
Like Truss, he will find that the market can respond quickly, and harshly, to force discipline.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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