Healey faces Budget balancing act as rising inflation begins to hit home

Public sector net borrowing was £8.1 billion above the OBR forecast for the financial year to August, largely driven by higher-than-expected spending and reflecting the impact of inflation. Despite slightly better-than-forecast tax receipts, August saw an unwelcome deterioration in the public finances, further reinforcing the need for the Chancellor to prioritise repair of the public finances at the Budget, the Resolution Foundation said today (Tuesday).

Borrowing was £18.3 billion in August 2026 – the second highest August on record (after the pandemic) – £3.5 billion above the OBR forecast. Borrowing was £77.3 billion in the financial year to August 2026, £8.1 billion above forecast.

With receipts running £1.1 billion above the OBR’s forecast for the first five months of the year, higher-than-expected borrowing was more than accounted for by higher spending. Central government was spending was £6.3 billion above forecast year to date, with the impact of higher inflation on debt interest and net social benefits accounting for £4.5 billion of that.

All this reinforces the challenges facing the Chancellor in his first Budget. Conflict in the Middle East has pushed up the cost of servicing the national debt, which is likely to deliver a £10-15 billion hit to borrowing in 2029-30, the year in which the fiscal rules bind.

The challenge of high inflation and borrowing costs mean that the Chancellor will need to prioritise fixing the public finances while also providing targeted support to families struggling with the cost of living.

James Smith, Chief Economist at the Resolution Foundation, said:

“Five weeks out from the Budget, the public finances remain on shaky ground, with borrowing this year already above the OBR’s forecast. And the picture looks likely to get worse this winter, as rising inflation driven by spiralling energy and petrol prices will mean higher government borrowing costs and a further squeeze on living standards.

“This leaves the new Chancellor with a tricky balancing act – he will need to think carefully about how to help families without fuelling further deterioration in the public finances. Any support should be carefully targeted towards those that need it most.

“But the Chancellor also cannot afford to squeak through the Budget with reduced headroom, that gives him little buffer against fresh shocks. Instead, he needs to work on how to repair the public finances in the long-term, particularly given uncertainty about how future spending commitments – such as that on defence – will be funded.”