John Healey oversaw £1.8bn of public sector borrowing in July, his first full month as Chancellor, as new data showed spending growth outpacing tax receipts and left markets wrong-footed ahead of his first Budget on 28 October. Analysts had expected the Office for National Statistics to record a broadly flat position for the month, making the borrowing figure an early complication for a new Chancellor already managing a crowded spending agenda.
The ONS figure also came in above the Office for Budget Responsibility’s own forecast for July. Grant Fitzner, chief economist at the ONS, said borrowing across the financial year to date remained below the same period last year, both in cash terms and as a share of the economy, but acknowledged the position was above the OBR’s spring forecast. ‘Borrowing was slightly higher this month than in July last year, with spending growth outpacing higher receipts, including from self-assessed taxes which often feed in more strongly in July,’ Fitzner said.
Public sector debt held below the £3 trillion mark despite suggestions in recent weeks that it had crossed the threshold. Debt interest payments for July reached £7.7bn.
Healey first Budget borrowing set against G7 cost pressure
Dennis Tatarkov, senior economist at KPMG UK, pointed to the Iran conflict as a source of ongoing pressure on the public finances. Short-term measures on the cost of living and the state propping up the economy after the price shock from the Iran war ‘are likely to keep near term borrowing elevated,’ he said. Looking further ahead, Tatarkov warned that while the Chancellor may be tempted to use leeway in the fiscal rules to boost spending, ‘the market’s appetite for more debt is limited, especially at a time when the UK Government faces the highest borrowing costs in the G7.’
Panmure Liberum economist Simon French offered a more measured reading on Thursday, saying Healey would not be required to raise taxes at the Budget purely to remedy the short-term public finances position, unlike the situation faced by his predecessor. French put the available fiscal buffer at closer to £15bn rather than £22.7bn, but suggested Healey was nonetheless likely to hike taxes to fund spending pledges on defence and the cost of living.
The BBC has reported that the fiscal rules inherited by Healey, set by former chancellor Rachel Reeves, include a pledge to balance day-to-day spending with tax revenues by the end of the decade. That framework constrains the room the new Chancellor has to manoeuvre, even if the immediate picture stops short of requiring an emergency tax response.
Defence spending and cost-of-living pledges add to the bill
Healey arrived in the role carrying a significant defence commitment. He resigned as defence secretary under Sir Keir Starmer, saying he was ‘certain’ that Britain should lift spending to 3% of GDP by 2030. According to The Guardian, the government has a £15bn increase in defence spending over five years already pencilled in, a figure that will add to the structural pressures the October Budget must address.
Prime Minister Andy Burnham has also announced a package of cost-of-living measures that the Budget will need to accommodate, including scrapping VAT on domestic electricity bills, reducing business rates for pubs, and capping bus fares in England. The combination of higher defence commitments and new household support measures narrows the path through which Healey can present a fiscally orthodox Budget while meeting those obligations.
The Chancellor defended his opening month in the role. ‘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,’ Healey said, adding that ‘fiscal discipline is the bedrock of our UK economic stability and national security.’
Opposition voices were less satisfied. Shadow chancellor Sir Mel Stride said: ‘They already plan to borrow over a quarter of a trillion pounds more than the plans they inherited, tapping the nation’s credit card while the bailiffs are at the door. It is ordinary families, their children and grandchildren who are left to cover the bill.’
The July data is one of the last full monthly readings Healey will see before the Budget. Only August and September figures will come through before he stands up on 28 October, leaving the OBR to frame its forecast in part around how public finances respond to the ongoing energy price shock from the Strait of Hormuz. The watchdog had previously acknowledged it underestimated borrowing in the wake of Russia’s invasion of Ukraine, a finding that suggests it may apply a more cautious lens to the current disruption when it publishes its next assessment alongside the Budget.
