Record tax receipts have failed to keep pace with rising government spending, intensifying the fiscal challenge facing Chancellor John Healey ahead of the Autumn Budget.
Government borrowing reached £18.3bn in August, £3.5bn above the £14.8bn forecast by the Office for Budget Responsibility, while public sector debt remained elevated at 93.8 per cent of GDP. Debt interest alone cost the government £8.8bn during the month.
Tom Goddard, assistant manager at audit, tax and business advisory firm Blick Rothenberg, said the figures highlighted the increasingly difficult choices facing the Chancellor.
“The Chancellor, John Healey, is facing a growing fiscal challenge in the lead up to the Autumn Budget. Borrowing reached £18.3bn in August, an increase on the £14.8bn forecast by the Office for Budget Responsibility (OBR), while public sector debt remains at high levels at 93.8% of GDP. Debt interest costs alone totalled £8.8bn for the month.”
The deterioration in the public finances has not, however, been caused by a collapse in tax revenues. Government receipts reached £68.8bn in August, the highest figure recorded for the month, while HMRC data showed total receipts of £962.6bn over the 12 months to August 2026.
Income tax accounted for 35 per cent of receipts over the period, followed by National Insurance contributions at 22 per cent and VAT at 19 per cent.
Goddard said the figures instead pointed towards expenditure growing faster than revenues, with inflation increasing pressure on government finances.
“The increased borrowing was, however, not the result of weak tax receipts. Indeed, Government revenues continue to grow, with £68.8bn collected in August, the highest August figure on record. HMRC’s latest statistics show that total receipts over the 12 months to August 2026 reached £962.6bn, with income tax (35%), National Insurance Contributions (22%) and VAT (19%) remaining the largest contributors.”
He added: “Rather, the increased borrowing is likely being driven by government spending growing faster than revenues. Inflation continues to be the main driver behind this, as the wars in Iran and Ukraine drive up fuel prices which only exacerbate the issue.”
The combination of higher spending requirements, elevated debt servicing costs and demands for additional government support is leaving ministers with limited room for manoeuvre before the Budget.
Goddard said: “Reports suggest the Chancellor has only around £10bn of fiscal headroom remaining. With increasing demands for higher defence spending and further cost of living support, the scope for significant new spending commitments appears limited. As such, some form of tax increase now seems increasingly likely.”
The composition of tax receipts also contains an unusual development. Inheritance Tax receipts fell to £598m in August, down from £658m in the same month of 2025 and £697m in August 2024.
The monthly decline is unlikely on its own to establish a lasting trend, but it could point towards changes in taxpayer behaviour as households respond to the prospect of higher inheritance tax liabilities.
Goddard said: “One notable exception within the tax receipts data is Inheritance Tax (IHT). Receipts for August 2026 were £598m, lower than both August 2025 (£658m) and August 2024 (£697m). While it is difficult to draw conclusions from a single month’s figures, the decline may reflect behavioural changes as more families recognise they could be within the scope of IHT and take proactive estate planning measures to reduce their exposure.”
The figures leave the government confronting a familiar fiscal dilemma: tax revenues are rising, but not fast enough to offset the demands being placed on public spending.
With the Budget approaching, the pressure on ministers is likely to intensify as they seek to accommodate defence requirements and household support while maintaining investor confidence in the sustainability of the public finances.
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