The joint report by the Institute for Fiscal Studies and Citi, the investment bank, released on Wednesday said public debt will continue to rise as a share of national income — even after the government’s support for energy prices ends — contrary to Kwasi Kwarteng’s claims. Accusing Kwarteng of increasing borrowing just when it is becoming expensive, the report follows the release of official data showing that in August public borrowing rose to twice the level expected by the independent fiscal watchdog. The IFS-Citi report said the government’s energy price support package could cost more than £100bn, but the price would depend heavily on international energy prices. More seriously, he said, permanent tax cuts of £30bn a year, expected to be announced in Friday’s mini-budget, alongside rises in debt interest costs and welfare payments would push borrowing into unsustainable flat. Borrowing levels are expected to be £60bn a year higher than the Office for Budget Responsibility forecast in March, according to the analysis. Isabel Stockton, economist at the IFS, said: “Borrowing at this level – almost double the share of national income seen on average between the second world war and the global financial crisis, when growth prospects were much stronger – would see debt continue to rise as a share of national income.” The analysis calls into question Kwarteng’s claim that the tax cuts will boost growth and help reduce debt. But even after the disappointing borrowing figures on Wednesday, the chancellor was unapologetic about the government’s new strategy. He said strong growth and sustainable public finances went hand in hand. “As chancellor, I am committed to reducing debt in the medium term. However, in the face of a major economic shock, it is absolutely right for the government to act now to help families and businesses, as we did during the pandemic,” he said. The difficulty for the new Treasury team is that public finances are deteriorating at a time when inflation is high and there is limited scope for a large fiscal stimulus to stimulate growth without creating inflationary pressures. Markets worry that a borrowing and spending package when unemployment is at a 50-year low will leave the UK living beyond its means and require the Bank of England to hit the brakes. In August, the public sector borrowed £11.8bn, higher than the City’s forecast of £8.8bn and almost double the amount estimated by the OBR earlier this year, according to official figures published on Wednesday. The watchdog previously predicted the deficit in August would be just £6bn. The figures did not show that the slowdown in economic growth had increased borrowing, with central government tax receipts of £69.6bn just short of the OBR’s expectation of £70.5bn. In contrast, public spending was higher than expected. Debt interest payments, linked to higher inflation, were £8.2bn, well above the £4.9bn expected, and other public spending also beat forecasts.

The only bright spot in the data was that borrowing for the first four months of the financial year was revised down by £8.6bn, leaving the starting point close to the original OBR estimates. This improvement, however, masked a progressive deterioration in finances during the financial year. Jens Larsen, director of consultancy Eurasia Group, said the government’s strategy was likely to reduce the popularity of UK assets in financial markets. “The combination of a potentially expensive and relatively ineffective fiscal package, a central bank intent on demonstrating its independence and a very large net pocket supply is likely to lead to continued upward pressure on UK risk premiums,” Larsen said.