Borrowing hits record ahead of Coalition cuts

The gaping hole in the public finances was laid bare yesterday after borrowing grew to a record level in August as interest payments on sovereign debt jumped in line with higher inflation.

According to figures from the Office for National Statistics, public sector net borrowing reached £15.302bn last month. The amount was worse than analysts' forecasts, which had shown government borrowing at £12.5bn.

The disappointing figures will add fuel to the Coalition Government's argument that it needs to make radical budget cuts in next month's Comprehensive Spending Review. The Chancellor, George Osborne, will outline on 20 October where the axe will fall, with the Treasury saying yesterday that the deficit figures underlined the need to push ahead.

"The public finances disappointingly deteriorated in August, thereby keeping pressure on George Osborne to fully deliver on the targeted overall spending cuts," said Howard Archer, the chief economist at IHS Global Insight. "Indeed, the increased August public deficit is likely to reinforce the Government's determination not to ease up on its austerity efforts, given that this remains critical to the UK retaining its AAA credit rating."

Some economist have said that far from curing Britain's economic ills, the cutbacks could cause a double-dip recession and lead to thousands of pubic-sector job losses. Earlier this week, the ratings agency Moody's praised the deficit reduction plan and reaffirmed the UK's triple-A rating. It said the Coalition's commitment to stabilisiling and eventually reversing the deterioration was its "financial strength", adding: "Government debt is also well structured, thus limiting refinancing risk."

The increased August shortfall came after current expenditure jumped 11 per cent year on year, while year-on-year receipts grew at a reduced rate of 6.3 per cent. But some economists were sanguine about the figures. Philip Shaw, of Investec, said the ONS frequently revised its numbers as more data was collected. "There are some positive revisions to back data, so overall it does not look like the public finances will be blown off course for the year as a whole," he said.

Mr Archer warned that it would be a mistake to rely on one month's figures, saying: "Indeed, the public finances still show modest overall improvement during fiscal year 20110-11. Specifically, [borrowing] has narrowed to £58.1bn during April to August from £61.9bn a year earlier."