The UK government borrowed more than anticipated in July, underscoring the financial challenges facing Chancellor Rachel Reeves ahead of her first budget.

According to official data, public sector borrowing stood at £3.1 billion in July, down from £13.5 billion in June due to a strong inflow of tax receipts but still exceeding City forecasts of £1.9 billion.

This marks the highest borrowing for July in three years and is up by £1.8 billion compared to the same month last year, reported the Office for National Statistics (ONS).

Borrowing in the current financial year has surpassed the Office for Budget Responsibility’s forecast by £4.7 billion.

The higher borrowing may heighten expectations that the Chancellor will announce tax increases on October 30. Reeves has emphasized the need for “difficult decisions” to restore public finances following 14 years of slow economic growth under the Conservative government.

Jessica Barnaby, Deputy Director for Public Sector Finances at the ONS, noted, “July borrowing was almost £2 billion higher this year than in 2023. Revenue was up on last year, particularly income tax receipts.”

“However, this was offset by increased central government spending, where the costs of public services and benefits continued to rise despite a reduction in debt interest,” she added.

Darren Jones, Chief Secretary to the Treasury, stated, “Today’s figures confirm the challenging legacy we inherited from the previous government. A £22 billion deficit in public finances this year, a decade of economic stagnation, and the highest public debt levels since the 1960s, diverting taxpayers’ money from public services to debt interest payments.

“We are making the tough decisions necessary to fix our economic foundations, modernize public services, and rebuild Britain to put more money back into people’s pockets across the country,” Jones added.

Higher debt levels and weak underlying growth have increased the sensitivity of public finances to changes in interest rates, complicating efforts to significantly cut taxes or boost spending without violating fiscal rules.

Debt interest spending climbed to £7 billion in July, the second-highest total for the month since records began in 1997. The debt-to-GDP ratio reached 99.4 percent, up 3.8 percentage points from July last year.

Financial market traders anticipate that the Bank of England will cut rates twice more this year, lowering the base rate to 4.5 percent from 5 percent. There is a 50-50 chance that rates will fall again at the Bank’s next rate-setting meeting on September 19.

Reeves has stated she will adhere to current fiscal targets aimed at reducing debt as a share of GDP within five years and balancing the current budget. However, she has suggested potentially altering the debt definition within these rules, which could generate £16 billion in cash.

Post-March budget estimates showed headroom against the targets at £8.9 billion, the smallest margin ever. Reeves is expected to raise taxes in her inaugural budget, citing a £21.9 billion government overspend, partially inherited from the previous Conservative administration.

The largest contributor to the unexpected spending was Reeves’ decision to approve a £9.4 billion pay increase for public sector workers, including a 14 percent raise for train drivers.

Unprotected government departments, such as local councils and the justice system, face about £20 billion in real-term budget cuts. Several investment projects were canceled as part of Reeves’ “fiscal audit.”