UK public sector borrowing higher than expected in July

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The UK government borrowed more money than expected in July, official figures show, highlighting the budgetary challenges facing Labour Chancellor Rachel Reeves.

The National Bureau of Statistics said on Wednesday that public borrowing, the difference between public spending and revenue, was $3.1 billion in July, up $1.8 billion from the same month in 2023 and the highest July level since 2021.

The figure is significantly higher than the $100 million forecast by Britain's fiscal watchdog, the Office for Budget Responsibility, and the $1.5 billion estimate of economists polled by Reuters.

The overhang was due to higher-than-expected inflation and wages growth pushing up operating costs, but tax revenues also slightly missed the OBR's forecasts.

The data highlights the Labour government's struggle to fund its policies amid soaring debt levels.

Rob Wood, an economist at Pantheon Macroeconomics, said Chancellor of the Exchequer Rachel Reeves would likely have to raise taxes and borrow more in the medium term to fund spending on public services.

Earlier this month, Reeves left open the possibility of further borrowing ahead of his first budget due on October 30 after the government confirmed it was taking a hit from $22 billion in underfunded spending commitments.

Today’s figures are further proof of the terrible legacy the previous government left us,” Treasury Secretary Darren Jones said on Wednesday. “We are taking the tough decisions needed to fix the foundations of our economy.”

Public debt, or borrowing accumulated over time, stands at 99.4% of GDP, the lowest level since the early 1960s as spending has surged during the pandemic.

Borrowing for the first four months of the financial year to June was £514m, £50m lower than the same period last year but £47m higher than the OBR had forecast.

The difference between the OBR's March forecast and the amount borrowed will affect the amount of headroom the Chancellor has ahead of his first budget in the autumn.

Fiscal space is the amount of room or buffer a government has to increase spending or cut taxes within its own fiscal constraints. Labour has pledged to reduce national debt relative to GDP within five years.

Denis Tatarkov, an economist at British consultancy KPMG, estimates that the government's cash reserves to comply with fiscal rules will fall further to $6 billion from $9 billion in March.

He added that while strong economic growth in the first half of the year had boosted imports, imports could be limited in the second half as GDP growth is expected to slow going forward.

The ONS said central government spending on public services and benefits continued to rise along with inflation, but this increase was partly offset by a decline in debt service interest payments compared to July last year. Overall, public sector spending was £3.8bn higher than in July last year.

Capital Economics economist Alex Kerr said: Overall, today's announcement paints a picture of the tightening fiscal situation ahead of the Chancellor's first budget on October 30.

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