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

The UK government ran an unexpected £1.8bn deficit in July, exceeding official forecasts by £2.3bn. As Chancellor John Healey prepares for his first Budget on 28 October, higher welfare spending and rising debt-interest bills threaten to squeeze public finances and limit room for manoeuvre.

July Deficit and Office for National Statistics Figures

The UK government ran a larger than expected £1.8bn deficit in July, surprising city economists who had anticipated a short-term shortfall of zero during a month typically bolstered by self-assessment income tax receipts. Official data published by the Office for National Statistics showed that borrowing outpaced official forecasts from the Office for Budget Responsibility by £2.3bn.

Self-assessment tax paid in July reached £17.1bn, marking a £1.7bn increase compared with the same month last year. Despite that revenue surge, overall spending growth outpaced receipts, driving the monthly deficit to two thirds higher than July of the previous year.

For the first four months of the government’s fiscal year spanning April to July, the cumulative deficit reached £56.7bn. While this figure sits lower than the same period last year, it runs £2.3bn ahead of the trajectory projected by the Office for Budget Responsibility.

Welfare Spending Pressures and Cost of Living Measures

The higher-than-expected borrowing figures were driven primarily by increased welfare spending. Outlays for benefits and other government payments, including the state pension, with social payments alone climbing £2bn higher than the same period last year.

These spending pressures arrive as Chancellor John Healey and Prime Minister Andy Burnham face competing demands to ease cost of living pressures for households and direct support toward youth employment. Economists warn that these commitments, combined with slower economic growth, will narrow the government’s financial options ahead of the upcoming legislative and budgetary announcements.

“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.”

John Healey, Chancellor

Fiscal Rules and October Budget Constraints

Healey has committed to overseeing strong fiscal discipline at the upcoming Budget on 28 October, adopting the fiscal rules established by his predecessor Rachel Reeves. Those rules require day-to-day spending to be funded entirely through tax receipts by the end of the decade.

At the spring statement in March, Reeves held a buffer of £23.6bn against those fiscal rules. However, analysts note that inflation, slower growth, rising bond yields, and the aftermath of the Iran conflict have eroded that headroom.

Ashley Webb, senior economist at Capital Economics, described the latest data as a continuation of a bbc.co.uk for the economy, warning that there will be little scope to raise borrowing in the Budget later this year. Joe Nellis, head of economic research at accountancy firm MHA, added that the figures would not prevent difficult decisions that must be made in the upcoming October Budget.

Rising Gilt Yields and National Debt Pressures

Global bond market movements have pushed up government bond yields, creating an additional challenge for the Treasury. Martin Beck, chief economist at WPI Strategy, noted that ten-year gilt yields exceeding 5% reflect energy-related inflation concerns that will gradually increase the cost of servicing existing debt as it is refinanced.

Beck pointed out that at the same time, the government faces pressure to loosen inherited spending plans, meet unfunded defence commitments and deliver on its own ambitions for housing, infrastructure and public services.

Britain’s overall public debt reached £2.98tn in July, representing 94% of GDP. That borrowing expansion aligns with government plans to fund infrastructure investments.

Political Reactions and Opposition Warnings

“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.”

Photo: bbc.co.uk

Mel Stride, Shadow Chancellor

Nellis warned that failure to implement additional tax revenue, tighter control over public sector spending and changes elsewhere could unsettle financial markets and drive government borrowing costs higher.

Healey faces the task of securing an additional £1.2bn annually to support the defence investment plan—a priority that led to his resignation as defence secretary in June over funding concerns—while keeping public borrowing within the limits required by fiscal rules ahead of the 28 October budget.