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In July, government borrowing exceeded expectations, according to recently released data, as Chancellor John Healey prepares his inaugural Budget. The Office for National Statistics (ONS) reported that borrowing—the difference between government spending and tax revenue—amounted to £1.8 billion for the month. This figure contrasted with official forecasts, which had predicted a £500 million surplus, indicating that borrowing was £2.3 billion higher than anticipated.
Economists have expressed concern that this unexpected borrowing level will limit the flexibility available to Chancellor Healey and Prime Minister Andy Burnham as they design policies to help households manage living costs. With borrowing already higher than forecasted, there is little room for significantly increased borrowing ahead of the October 27 Budget. Healey has emphasized his commitment to “strong fiscal discipline” in the upcoming Budget, which will restrict overall government spending. He has maintained the fiscal rules of his predecessor, Rachel Reeves, which require that day-to-day government spending is fully funded by tax revenues by the end of the decade.
July’s borrowing figure was markedly less than the £16 billion reported for June, aided by a jump in self-assessed income tax receipts that temporarily bolstered the government’s finances for the month. However, economists caution that this one-off surge is seasonal and typical for July, and once it dissipates, public finances may face renewed strain. Despite the decline from June, borrowing still outpaced expectations. Analysts have attributed this to higher welfare expenditures, including benefits and state pension payments, which were reported to be £2 billion more than during the same period the previous year.
Over the first four months of the government’s fiscal year—from April to July—the ONS recorded borrowing at £56.7 billion. While this total is below last year’s figure, it remains £2.3 billion above the projections put forward by the Office for Budget Responsibility (OBR), the body used by the government as a planning benchmark. Capital Economics’ senior economist Ashley Webb described the borrowing discrepancy as part of a continuing “run of bad news” for the economy, adding that there will be “little scope to raise borrowing in the Budget later this year.” Webb further noted that the borrowing gap “will probably get bigger” as economic growth slows and additional household support measures are introduced.
Joe Nellis, head of economic research at MHA, voiced that these borrowing figures will not eliminate the need for tough decisions in the upcoming October Budget. Chancellor Healey is expected to seek “additional tax revenue, tighter control over public sector spending and changes elsewhere” to align spending with fiscal rules. Nellis warned that failure to make these adjustments could “unsettle the financial markets and potentially push up the cost of government borrowing still further.” Meanwhile, the ONS also highlighted that the nation’s overall debt has neared £3 trillion, increasing by £127.2 billion over the past year. The Conservatives criticized Labour’s spending approach, claiming it will leave “ordinary families” shouldering the financial burden. Shadow Chancellor Mel Stride remarked, “We spend more on just the interest of our soaring debt than we do on our defence, police, and prisons combined. We simply cannot afford the price of Labour.”
Additionally, the ONS reported a decline in retail sales in July, with a 0.5% decrease from June. Analysts attributed the drop to exceptionally hot weather and an unusual boost in June sales related to the World Cup. The growth in clothing and footwear sales was the slowest since May of the previous year
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