Market News

UK government borrowing came in lower than expected in July, offering some relief to chancellor Rachel Reeves ahead of the autumn budget.

Public sector net borrowing fell to £1.1bn in July, figures from the Office for National Statistics (ONS), published on Thursday showed. This was lower than the £2.1bn forecast by the Office for Budget Responsibility (OBR) and a consensus forecast of £2.6bn. The figure was also £2.3bn less than in July 2024 and the lowest level of borrowing for the month in three years, the ONS said.

Rob Doody, deputy director for public sector finance at the ONS, said that July borrowing figure "reflects strong increases in tax and national insurance (NI) receipts".

Borrowing in July and January tends to be lower than in other months because of additional receipts from self-assessed income tax.

"However, in the first four months of the financial year as a whole, borrowing was over £6bn higher than in the same period for 2024," Doody added.

Government borrowing for the financial year to July came in at £60bn, according to the ONS, which was £6.7bn more than the same four months last year. This was also the third-highest level of borrowing for that period since monthly records began, after 2020 and 2021.

Central government receipts rose by £8.8bn year-on-year to £100.1bn in July. Tax receipts increased by £6.1bn ro £77.6bn, comprising of increases of £4.5bn in income tax receipts, £900m in value added tax (VAT) and £400m in corporation tax. An increase in employer NI contributions helped a £2.6bn rise in compulsory social contributions, bringing that total to £16.3bn.

However, provisional estimates showed that government spending came in at £92.1bn in July, which was £5.3bn more than the same month last year.

The latest borrowing figures leaves the UK’s net debt at 96.1% of gross domestic product (GDP), 0.5 percentage points higher than at the end of July last year and remains among the highest levels recorded since the early 1960s.

Alex Kerr, UK economist at Capital Economics, said that July’s borrowing undershoot is "not as good as it looks".

He pointed out that the "cumulative current budget deficit, which is what matters for the chancellor’s fiscal mandate, is a much larger £5.7bn above the OBR’s forecast".

"Ultimately, today’s release does little to brighten the gloomy outlook ahead of the budget later this year," Kerr said. "The government’s u-turns on spending cuts and potential upward revisions to the OBR’s borrowing forecasts mean the chancellor may need to raise £17bn to £27bn at the autumn budget to maintain the £9.9bn of headroom against her fiscal mandate."

"And given that she is struggling to stick to existing spending plans and we doubt the gilt market will tolerate significant increases in borrowing, most of that will have to be funded by tax rises," he added.

Danni Hewson, head of financial analysis at AJ Bell (AJB.L), said: "There is a great deal of good news to be found in July’s public sector borrowing figures but the overall predicament the chancellor finds herself in hasn’t changed. Borrowing for the month hit a three-year low thanks to a chunkier than usual self-assessment tax take and increased NI contributions."

“But that’s only half the picture," she said. "If you look over at the other side of the column spending also increased, with additional cash required to cover public sector pay rises, inflation linked benefit increases and all that extra investment the government is ultimately hoping will power growth."

“Add in a slight jump in borrowing costs compared to the previous year and it’s clear the UK is still stuck in the cycle of spending more than it brings in," Hewson added. "With big increases to pensions and benefits likely on the way next April, it’s clear Rachel Reeves will have to make more tough choices in the autumn."