Once again, the UK financial media have feasted on some disappointing UK macro data and naturally wheeled out more doom and gloom to cheer us all up over the weekend. On this occasion, I have to say that the data they are referring to, namely, government borrowing and revenue numbers for August, do not make for pleasant reading. They are unequivocally disappointing and will, in all probability, give Rachael Reeves and her Treasury team food for thought over the next few weeks.

Having said that, before we all start battening down the hatches for yet another crippling, tax-increasing budget, a moment of quiet reflection is required, maybe even healthy scepticism, because once again, all may not be what it appears to be with the data.

To help explain why, I am going to lean on the OBR’s helpful analysis of this set of ONS data, which, although caveated, does highlight some potential flaws, maybe even mistakes, in its composition.

Before doing so, I should outline the headline data for tax revenue and borrowing in August and for the first five months of this fiscal year. Here are the salient points:

1. Borrowing for the first five months of this fiscal year totalled £83.8 billion. This is £11.4 billion above the OBR’s March forecast.
2. This overshoot is primarily the result of upward revisions to the estimate of total local authority borrowing so far this year.
3. In addition, VAT and other tax receipts were lower than expected in August.
4. Interestingly, the ONS’s chief economist said, “Tax and national insurance receipts were noticeably higher than last year, but these increases were outstripped by higher spending on public services, benefits and debt interest.” Having looked through the ONS press release, I noticed there is no upfront reference to these local authority data revisions or the low VAT receipts data.

I know this is all a bit dry, but for those with an enquiring mind, I think there are some really interesting points made in the OBR’s commentary on these data.

First, on the revisions to local authority borrowing numbers:

The revisions by the ONS to local authority borrowing so far this year are based on provisional budget data, and therefore subject to further revisions. Typically, local authority borrowing data is revised significantly as additional data becomes available through the financial year and in subsequent years. In today's release, ONS have also incorporated new information on local authority borrowing in previous fiscal years, which has increased borrowing in 2022-23 by £2.9 billion and 2023-24 by £2.7 billion.

And secondly, on the low VAT receipts in August:

Cash VAT receipts were £ 12.8 billion in August, £3.2 billion (19.9 per cent) below forecast, and £1.4 billion (9.8 per cent) below last year. Cash receipts of VAT in August mainly relate to spending between May and July. Previous month's VAT receipts have been close to profile and nominal consumption, which drives VAT receipts, also appears to have been close to forecast so far this year. It is possible therefore that part of the August shortfall could be a one-off effect for example due to the timing of payments and repayments. It is also possible it could reflect the composition of spending if higher-than-expected food prices has led to more spending on zero-VAT rated items. For the year to date, cash VAT receipts are £3.0 billion (3.8 per cent) below forecast.

Reading between the lines, the OBR is making a few subtle points about these data. First, the comment that “typically local authority borrowing data is revised significantly” is a pretty heavy hint that it expects these borrowing numbers to be revised “significantly”. Secondly, it clearly calls out the VAT receipts data as a bit odd at best. In summary, VAT receipts should follow closely trends in nominal consumption, as the OBR helpfully points out. I don’t buy this idea that we have all suddenly been buying a lot more food and cutting back on everything else. Especially when I look at retail sales data, which was weak in May but strong in June and July and which was also above expectations in August.

My guess is that although these data are not especially encouraging at a headline level, these two anomalies explain a good proportion of the difference between what the OBR was expecting and what these data show. In other words, this has all the hallmarks of yet another ONS balls-up. We will see.

The OBR is not normally the source of good news, but its comments on what it expects for the remainder of this fiscal year are, believe it or not, quite encouraging. (The media ignored this, as you might have expected)

Here are the salient comments:

In the profiles consistent with our March 2025 forecast we expect lower borrowing in the second half of 2025-26 relative to 2024-25, reflecting a sharp rise in capital gains tax expected around the end-January due date, lower debt interest payments in the second half of the year, and lower growth in central government net social benefits which were unusually backloaded last year.

So, not all bad news then.

In summary, August’s data was not encouraging and will have disappointed Ms Reeves. Nevertheless, I don’t think they were near the “grim” definition the media used. Time will tell, but the helpful insights from the OBR are well worth paying attention to and will, I think, frame the Treasury’s thinking going forward.