Key takeaways

• Government’s fiscal dreams not yet reality
• The case against tax rises in next month’s budget
• Debt as a % of GDP is down, as economic growth picks up
• Pound remains stable after debt figures
• Oil prices back above $100
• The future of the AI trade remains strong

The UK’s public finance data for August made for more grim reading on the state of the UK’s public finances. The UK borrowed £18.3bn last month, up nearly 20% compared to a year ago, partly due to the impact of inflation. Borrowing in the financial year to August remains £8.1bn above the official government forecast for another month, which suggests that borrowing forecasts will need to be revised higher in next month’s Budget.

Government’s fiscal dreams not yet reality

The higher borrowing figure for August compared to a year ago came even though self-assessed income tax receipts were £1.9bn higher than 2025. Borrowing to fund day-to-day activities was £12.4bn in August, which is also above OBR forecasts, and suggests that the UK government’s aim to stop borrowing to fund everyday expenses is still some way off.

The case against tax rises in next month’s budget

There will be a lot of speculation from this data about next month’s Budget. Some will argue that it supports tax rises. However, tax take is increasing rapidly in the UK, which suggests that the UK’s borrowing is down to a spending problem, and if Healey raises taxes in next month’s budget instead of cutting spending, then the public finances will remain weak, and the debt interest bill will continue to rise.

Debt as a % of GDP is down, as economic growth picks up

However, although we are borrowing at a rapid rate, public sector net debt has grown by £78.5bn in a year, debt as a percentage of GDP was 93.8%, 1.3% lower than a year ago. This is a positive sign that our UK economy is growing at one of the fastest rates in the G7, which is having a mildly flattering effect on our debt position, it cannot be denied that our debt burden is punishing. The government had to spend £8.8bn on debt interest last month, the highest figure for August since records began.

Pound remains stable after debt figures

The higher August borrowing did not dent demand for the pound, which is up a notch on Tuesday. GBP/USD is trading in a tight range at $1.3370, and overall FX movements have been mild in recent days. The mild reaction to the UK public finance data suggests it will take a bigger catalyst to move the pound, which has been fairly resilient in the face of bon market volatility. UK Gilts staged a strong recovery on Tuesday, the 2-year yield fell 7bps and the 10-year dropped 8bps. A combination of the relentless rise in UK borrowing along with the pick up in the oil price could reverse some of this move later today.

Oil prices back above $100

The strong start to the week for risk assets is set to face a mini speedbump on Tuesday as the price of oil is higher by 1.5%, and Brent crude oil is back above $100 per barrel. The driver of the higher oil price may be down to reports that the Houthis are extending gains in Yemen to control the Red Sea. This is neutralizing some of the good news that Saudi Arabia is ramping up its Gulf oil exports, after the attacks on its East-West pipeline.

Tech trade bounces back, with Meta leading the charge

European stocks are set for a higher open later this morning, and US equity futures are mostly flat after a strong performance for the AI trade on Monday. Investor enthusiasm for AI was strong on Monday after Meta’s AI agent, Muse, surged to the top of Apple’s free app download rankings. This suggests that demand for costly AI tools is robust and worth the hundreds of billions of capex spent by the hyperscalers.

The future of the AI trade remains strong

If there is widespread adoption of Muse, it could add to demand for other AI tools, which could lift the AI sector, after a rough few months. Large cap growth stocks were the top performers on Monday, rising more than 2%, and Meta’s stock surged 11% on this news, and is extending gains in the pre-market on Tuesday, where it is currently higher by 0.5%. Intel, Meta, AMD, Super Micro and Marvell Technology, were also the top performers on Monday, as the success of Meta’s AI agent sparked a rush into AI software stocks. If: http://stocks.if AI products are popular then the hyperscalers will need even more compute capability to continue building them and expanding their capacity, which will accel;erate demand for chips and memory. This development could sustain the AI trade for the rest of this year, and help equities to continue to show resilience in the face of rising energy prices.