John Healey oversaw an unexpected deficit in the public finances during his first month as Chancellor, according to new figures, in a sign that the government may face tighter constraints than first thought ahead of its first budget.

Data released on Friday showed that government borrowing hit £1.8bn in July. Markets had expected the Office for National Statistics (ONS) to report no difference between expenditure and receipts for the month. The figure also came in above the estimate from the Office for Budget Responsibility (OBR), the independent fiscal watchdog whose forecasts underpin the government's fiscal rules. Monthly ONS borrowing figures are provisional and are routinely revised as more complete data on tax receipts and departmental spending come through.

ONS chief economist Grant Fitzner said: "Public sector borrowing was lower in the financial year to date than in the same period last year, both in total and as a share of the economy. However, it is above the OBR spring forecast.

"Conversely, 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."

The ONS also found that public sector debt remained below £3 trillion despite suggestions it had jumped over the threshold. Debt interest payments in July rose to £7.7bn. A comparatively high share of UK government debt is made up of index-linked gilts, meaning the interest bill moves with inflation.

Dennis Tatarkov, senior economist at KPMG UK, said short-term measures on the cost of living and the state propping up the UK economy after a price shock from the Iran war "are likely to keep near term borrowing elevated".

"Looking ahead to the Autumn Budget, 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," Tatarkov said.

Countdown to the Budget

The latest release is one of the last sets of statistics on the state of UK public finances that Healey will see before his first Budget on 28 October. He will get only a glimpse of August and September data before delivering the Andy Burnham government's fiscal agenda for the next year. The OBR will publish a fresh set of economic and fiscal forecasts alongside the Budget, which will set out how much headroom the Chancellor has against his fiscal rules.

Healey defended his first month of management over the public finances. The Chancellor said the government remained committed to the fiscal rules, and that "fiscal discipline is the bedrock of our UK economic stability and national security".

"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," he said.

Shadow chancellor Sir Mel Stride said "we simply cannot afford the price of Labour".

"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," Stride said.

Healey 'not required' to raise taxes

On Thursday, Panmure Liberum economist Simon French said Healey would not have to raise taxes at the Budget to remedy the state of the public finances in the short term, as Reeves may have had to do last year to build a fiscal buffer.

While French suggested the fiscal buffer was closer to £15bn than £22.7bn, he said the Chancellor was nonetheless likely to hike taxes to fund spending pledges on defence and the cost of living.

The government has already slapped down reports around property tax reforms in a bid to gain control over another autumn of speculation.

Ministers are currently enjoying a break from parliament before a return that will start a pre-Budget run-in lasting around two months.

Burnham and Healey's fiscal plans could yet be thwarted by President Trump's war against Iran, as trade disruption across the Strait of Hormuz has continued throughout peace negotiations.

Earlier this year, the Office for Budget Responsibility warned that it had previously underestimated government borrowing levels in the wake of Russia's full-scale invasion of Ukraine. The forecast review suggests the fiscal watchdog could take a more cautious view on how public finances respond to the latest energy price shock over the next few years.