Government Borrowing Below Forecast in July

London, 5 September 2025 — UK public sector borrowing in July dropped to its lowest level in three years, fueled by increased tax and National Insurance receipts, official figures revealed on Thursday. Despite this improvement, economists warn that Chancellor Rachel Reeves faces significant fiscal challenges ahead, likely necessitating tax increases in the upcoming autumn Budget.

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Government Borrowing Falls to £1.1 Billion in July, Lowest Since 2022

The Office for National Statistics (ONS) reported that UK government borrowing the shortfall between public spending and tax income was £1.1 billion in July 2025. This figure marks a £2.3 billion decline compared with July 2024 and represents the lowest July borrowing level recorded over the past three years.

The ONS credited the reduction to a notable rise in self-assessed income tax payments, which reached £15.5 billion in July, up 21% year-on-year by £2.7 billion. Additionally, National Insurance (NI) contributions increased following the April 2025 rise in employer NI rates.

However, borrowing over the first four months of the current financial year remains elevated at £60 billion, an increase of £6.7 billion compared with the same period last year. This cumulative borrowing aligns closely with projections made in March by the Office for Budget Responsibility (OBR), the UK’s independent fiscal watchdog.

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Chancellor Reeves’ Fiscal Challenge Remains Significant

Despite the better-than-expected borrowing data for July, analysts highlight ongoing fiscal pressures that may compel the government to increase taxes later this year.

Paul Dales, Chief UK Economist at Capital Economics, told the BBC’s Today programme that while the July data are positive, they do not alleviate the chancellor’s “predicament” ahead of the Budget. “We think she’s on track to miss her fiscal rule by something like £17 billion,” Dales explained. “If she wants to maintain the same buffer as in March, she might have to raise around £27 billion which is quite a large task.”

The so-called fiscal rules  which Chancellor Reeves enshrined in her Budget framework  aim to ensure that day-to-day government spending is fully funded by tax income by 2029-30 and that public debt as a share of national income falls by the end of the current parliament.

Dennis Tatarkov, Senior Economist at KPMG UK, noted the scale of the challenge: “The longer-term picture for public finances remains challenging. The upcoming Budget will likely focus on addressing a potential shortfall against current fiscal targets, which we estimate at £26.2 billion.” He added, however, that any assessment depends heavily on the latest OBR economic forecasts.

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Potential Tax Reforms Under Consideration

In political circles, speculation is mounting about the types of measures the government may pursue to bridge the fiscal gap. Extending the freeze on income tax thresholds, currently set to end in 2028, would effectively increase tax liabilities for middle earners by pushing more individuals into higher tax brackets.

Moreover, recent reports suggest that Chancellor Reeves is weighing reforms to property taxes, which could mark a significant policy shift and generate increased revenue from homeowners and real estate investors.

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Broader Context: Rising Debt Costs and Government Spending

The UK’s public finances remain under pressure amid growing debt servicing costs. Chief Secretary to the Treasury Darren Jones emphasized the burden these interest payments place on taxpayers: “Far too much taxpayer money is spent on interest payments for the longstanding national debt.” He stressed the government’s commitment to reducing borrowing over the parliament to free up funds for public services such as education and healthcare.

Reflecting on the economic environment and fiscal strategy, Lib Dem Treasury spokesperson Daisy Cooper said: “Getting the economy growing again and managing public finances carefully to bring down the national debt is critically important.” She argued that addressing structural issues such as the healthcare crisis and energy costs is key to improving the UK’s economic outlook.

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Economic Growth Picks Up After a Sluggish Spring

Supporting the positive tax revenue trends, a separate survey released on Thursday indicated an acceleration in UK private sector activity. The S&P Global Composite Purchasing Managers’ Index (PMI) rose to 53.0 in August from 51.5 in July, signaling continued expansion. A reading above 50 denotes growth.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “Economic growth has continued to accelerate over the summer after a sluggish spring, led by the services sector.” However, he cautioned that demand remains “both uneven and fragile,” influenced by lingering uncertainty over government policies and global geopolitical tensions.

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Historical and Future Perspectives on UK Borrowing

The trend of fluctuating borrowing figures reflects the UK’s broader economic dynamics. Historically, July borrowing tends to be lower due to the timing of self-assessment tax payments, which are usually collected mid-year. Nonetheless, the mounting public debt currently over £2.7 trillion and rising interest rates challenge the government’s ability to meet fiscal targets.

The OBR’s next forecast update, due in the coming months, will be pivotal in shaping the government’s Budget strategy. Small revisions to growth and inflation assumptions can substantially impact revenue projections, complicating the chancellor’s task of balancing growth-supportive policies with fiscal discipline.

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Conclusion: Fiscal Crossroads for the UK

While July’s borrowing figures provide a welcome respite for UK public finances, the broader fiscal outlook remains complicated. Chancellor Rachel Reeves is tasked with steering the government through persistent inflationary pressures, higher debt servicing costs, and a delicate economic recovery.

As policymakers prepare the October Budget, the likelihood of tax increases ranging from income tax threshold freezes to property tax reforms appears high. These decisions will play a critical role in shaping the UK’s economic landscape in the years ahead, influencing public services, investment, and household finances.

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