UK public sector borrowing higher than expected in July

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The UK government borrowed more than expected in July, according to official data that highlights the budget challenges facing Labour chancellor Rachel Reeves.

Borrowing — the difference between public sector spending and income — was £3.1bn in July, £1.8bn more than in the same month in 2023 and the highest July level since 2021, the Office for National Statistics said on Wednesday.

The figure was also much higher than the £0.1bn forecast by the Office for Budget Responsibility, the UK fiscal watchdog, and the £1.5bn predicted by economists polled by Reuters.

While the overshoot in borrowing was driven by higher than expected inflation and wage growth driving up running costs, tax revenues also marginally disappointed the OBR expectations.

The data underscores the challenge for the Labour government to fund its agenda amid soaring levels of debt.

“Chancellor Rachel Reeves will likely have to raise taxes and borrow more in the medium term to cover spending more on public services,” said Rob Wood, economist at Pantheon Macroeconomics.

Earlier this month, Reeves left the door open for more borrowing ahead of her first Budget on October 30, after the government identified a “fiscal hole” of £22bn of unfunded spending commitments.

“Today’s figures are yet more proof of the dire inheritance left to us by the previous government,” said Darren Jones, chief secretary to the Treasury, on Wednesday.

“We are taking the tough decisions that are needed to fix the foundations of our economy,” he added.

Public debt, or borrowing accumulated over time, was 99.4 per cent of GDP, remaining at levels last seen in the early 1960s, due to higher spending during the Covid-19 pandemic.

In the first four months of the fiscal year to June, borrowing was £51.4bn. That was £0.5bn less than the figure for the same four months last year, but £4.7bn more than forecast by the OBR.

Differences in borrowing from the OBR’s March forecasts will affect the headroom that the chancellor has ahead of her first Budget in autumn.

Fiscal headroom refers to the amount of leeway or buffer the government has within its generally self-imposed fiscal constraints to increase spending or cut taxes. Labour has pledged to have national debt falling as a share of GDP within five years.

Dennis Tatarkov, economist at the consultancy KPMG UK, estimated the headroom the government has to meet its fiscal rules decreased further to £6bn, from £9bn in March.

He added that while strong economic growth in the first half of the year had helped revenues “an expected slowing in GDP growth ahead could limit revenues in the second half of the year”.

The ONS said central government spending on public services and on benefits continued to rise with inflation, though these increases were partially offset by a reduction in debt interest payable compared with July last year. Overall, public sector spending was up £3.8bn from July last year.

Alex Kerr, economist at Capital Economics, said: “Overall, today’s release highlights the tight fiscal backdrop that the chancellor faces ahead of her first Budget on 30 October.”