Strong spending on public services and welfare pushed government borrowing last month to more than double its level in the same period a year earlier, adding fuel to the row between Labour and the Conservatives over the health of the public finances.
The £3.1bn deficit was the highest for a July in three years and £3bn higher than expected by the government’s spending watchdog, the Office for Budget Responsibility (OBR).
The Office for National Statistics (ONS) said strong growth in public spending was the main factor behind the borrowing overshoot.
Jessica Barnaby, the ONS deputy director for public sector finances, said: “July borrowing was almost £2bn higher this year than in 2023. Revenue was up on last year, with income tax receipts in particular growing strongly.
“However, this was more than offset by a rise in central government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.”
The UK’s public finances are typically strong in July, owing to the boost provided by income tax self-assessment returns. In 2023, the UK had to borrow £1.3bn in July to cover the gap between the state’s revenue and its spending.
Analysts warned that the disappointing borrowing figures would result in a tough budget from the chancellor, Rachel Reeves, on 30 October.
Alex Kerr, a UK economist at Capital Economics, said the figures highlighted the tight fiscal position faced by Reeves. “We still think that she will look to raise an additional £10bn a year via higher taxes in the budget and increase borrowing by around £7bn a year,” Kerr said.
Isabel Stockton, a senior research economist at the Institute for Fiscal Studies, said: “All of the data is preliminary and we should be cautious of overinterpreting it. But the early signs are that better-than-expected growth figures won’t be enough to save Rachel Reeves from tough choices in her first budget.
“The combination of in-year spending pressures identified at last month’s spending audit and the ongoing, and well-known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise.”
Darren Jones, the chief secretary to the Treasury, said: “Today’s figures are yet more proof of the dire inheritance left to us by the previous government. A £22bn black hole in the public finances this year, a decade of economic stagnation, and public debt at its highest level since the 1960s, with taxpayers’ money being wasted on debt interest payments rather than on our public services.”
The July figures from the ONS mean that, in the first four months of the 2024-25 financial year, the UK borrowed a total of £51.4bn. This is £500m less than in the same four-month period a year earlier, but the fourth highest year-to-July borrowing since monthly records began in January 1993, the ONS said.
At the time of the former chancellor Jeremy Hunt’s March budget, the OBR said it expected borrowing for this financial year as a whole to be £87bn. The deficit is now £4.7bn higher than the OBR forecast.
Reeves is planning to raise taxes, cut spending and get tough on benefits in October’s budget amid Treasury alarm that the pickup in the economy has failed to improve the poor state of the public finances.
Reeves said the previous government had given her the worst inheritance of any postwar chancellor, accusing the Conservatives of covering up a £22bn black hole.
Hunt, Reeves’s immediate predecessor, has said Labour inherited a growing and resilient economy, and that the chancellor was trying to find political cover for tax increases she had always intended before taking office.
Tax receipts increased by £2.1bn to £71.2bn, including a £1.7bn increase in income tax receipts, £300m more in corporation tax, and £200m of VAT.
However, there was a £1.1bn drop in “compulsory social contributions”, to £13.8bn, because of the reductions in the main rates of national insurance made by Hunt.
