UK borrows more than expected in July as Healey prepares for first budget

The government took on more debt than expected in July, according to figures released as chancellor John Healey draws up his first budget.

The Office for National Statistics (ONS) said borrowing – the gap between what the government spends and what it collects in taxes – was £1.8bn during the month.

Official forecasters had expected a surplus of £500m, meaning the government borrowed £2.3bn more than planned.

Economists warned the figure will restrict Healey and Prime Minister Andy Burnham’s room for maneuver as they target measures aimed at easing the cost of living for households, with little room to increase borrowing in the October 27 Budget.

Healey has made clear he will oversee “strong fiscal discipline” in the Budget, limiting how much the government has to spend.

He has adopted his predecessor Rachel Reeves’ fiscal rules, which commit the government to funding all daily spending through tax revenue by the end of the decade.

Responding to the debt figures, Healey said: “We are cutting the deficit faster than any other G7 economy, while giving people some breathing room from cost of living pressures and focusing support on getting young people into work.”

July’s borrowing figure was significantly lower than June’s £16bn, with a rise in self-assessed income tax receipts boosting the government’s coffers for the month. But economists said public finances would come under renewed pressure when the one-off increase, typical in July each year, runs out.

Despite falling from June to July, the debt figure was higher than expected. Experts pointed to an increase in spending on social care, including benefits and other payments such as the state pension, with social payments amounting to £2bn more than the same period last year.

The ONS said borrowing from April to July, the first four months of the government’s financial year, reached £56.7 billion. This figure is lower than last year, but £2.3bn more than forecasts from the Office for Budget Responsibility (OBR), which the government uses when drawing up its spending plans.

Ashley Webb, senior economist at Capital Economics, said the figure continued a “string of bad news” for the economy and that “there will be little room to increase borrowing in the budget later this year.”

He said excess borrowing would “likely increase” this year as economic growth slows and the government implements more measures to support households with the cost of living.

Joe Nellis, head of economic research at accounting firm MHA, also said the figures will not “prevent difficult decisions that will need to be made in the upcoming October budget.”

Healey will have to find “additional tax revenue, tighter control over public sector spending and changes elsewhere” to balance the books and comply with the government’s fiscal rules.

“Failure to do so will destabilize financial markets and potentially drive up the cost of government borrowing even further,” Nellis warned.

The ONS also said Britain’s total debt is approaching £3 trillion, having increased by £127.2 billion in the previous year. The Conservatives said Labour’s spending would leave “ordinary families” to foot the bill.

Shadow chancellor Mel Stride said: “We spend more on interest alone on our growing debt than on defence, policing and prisons combined. We simply cannot afford Labour’s price tag.”

The ONS also said retail sales were lackluster in July, falling 0.5% on June. Analysts said the drop was caused by an increase in warm weather and a surge in sales induced by the World Cup in June. Apparel and footwear saw the slowest growth since May last year.