UK government borrowing unexpectedly rose to £1.8billion in July after higher spending pushed the budget deficit £700million higher than a year ago, official figures show.
The unexpected increase in borrowing caught economists by surprise, while official forecasters at the Office for Budget Responsibility (OBR) had expected a surplus of £500million for the month.
A higher tax take, which included record receipts from self-assessed income tax, failed to offset the increased borrowing costs brought on by inflation, according to data from the Office for National Statistics (ONS).
The ONS reported that the government spent £2billion more on social benefits than in the same period last year, while public expenditure on goods and services, including staff costs, rose by £2.5billion.
Public debt and budget targets
Government borrowing for the financial year to date has reached £56.7billion, running ahead of the £54.4billion previously projected by the OBR watchdog.
Total UK public debt rose to £2.98trillion, representing 94 per cent of gross domestic product (GDP). The figure is up by £96billion compared with a year earlier, reflecting higher borrowing by the Labour administration to fund infrastructure projects.
The latest figures highlight the intense fiscal pressures on Prime Minister Burnham, who has introduced a wave of cost-of-living policy initiatives since taking office at Number 10 Downing Street.
The expanding deficit leaves Chancellor John Healey facing a severe challenge as he attempts to balance government spending on welfare and national defence against elevated borrowing levels.
Rising interest rates and market pressure
The financial pressure on the Treasury has been compounded by a sharp rise in government borrowing costs this week, reducing the Chancellor's fiscal flexibility ahead of upcoming budget decisions.
The yield on 10-year UK government bonds, known as gilts, reached 5.155 per cent at one point during the week, marking the highest level seen since August 2007.
Martin Beck, chief economist at WPI Strategy, said higher borrowing costs would limit the Chancellor's scope for action in the autumn, predicting that Mr Healey would present a "relatively modest package".
Mr Beck indicated the government is likely to focus on "some targeted spending increases, a handful of smaller tax rises and perhaps a limited increase in borrowing".
He added: "Any attempt to go significantly further, through large-scale capital spending, major tax cuts, such as a rise in the personal allowance, or another change to the fiscal rules, would put renewed focus on gilt issuance."
Treasury response and fiscal rules
Chancellor John Healey insisted the government remains committed to maintaining control over public finances despite the worsening deficit.
"Fiscal discipline is the bedrock of our UK economic stability and national security, which is why we are committed to meeting our fiscal rules, with a buffer against global uncertainties," Mr Healey said in a statement.
He added: "We are cutting the deficit faster than any other G7 economy while giving people a bit of breathing space with cost-of-living pressures and focusing support to get young people into work."
