New Chancellor given pre-Budget challenge as borrowing jumps unexpectedly

Susannah Streeter, chief investment strategist at Wealth Club, says official figures showing government borrowing unexpectedly rising to £1.8 billion last month is concerning.

She said: “Higher energy costs are keeping up the inflationary pressures with Brent crude staying above $93 a barrel, up more than five per cent this week.

“The US-Iran conflict shows no sign of abating, with the standoff over the Strait of Hormuz keeping a hefty risk premium baked into oil prices, while disruption to Russian energy infrastructure is adding another layer of uncertainty.

“With energy prices feeding through into transport, heating and the cost of goods, a sustained rise in crude could make the inflation battle even more difficult.

“The turmoil in the debt markets continues despite efforts to calm feverish borrowing costs.

“US Treasury Secretary Scott Bessent tried to throw cold water onto hot government bond yields by doubling the size of planned Treasury buybacks, but it’s not touching the sides of the deep-seated problem.

“Investors remain concerned about inflationary risks and the growing mountain of government borrowing, while at the same time, debt being issued by tech giants building out the AI revolution is offering stiff competition.

“Given the high ratings on the corporate bonds being pumped out by the hyperscalers, more capital has another attractive destination beyond Treasury markets, adding to the pressure on government debt.

“Higher yields are also giving equities a run for their money, with investors seeking out more stable returns compared to the risks inherent in equity markets, given the mega valuations out there.

“The yields on long-dated Treasuries are back above 5.3 per cent, having dipped on Thursday. Thirty-year gilt yields have been hovering around 5.8 per cent, as concerns continue to swirl about the UK’s fragile fiscal position.

“The latest snapshot of UK Government borrowing won’t do much to assuage fears that Britain is living beyond its means.

“Borrowing came in at £1.8 billion in July 2026, which was £0.7 billion more than in July 2025, and £2.3 billion above the Office for Budget Responsibility’s forecast.

“Even though the amount the Exchequer is pulling in through higher taxes grew, helped by a strong influx of self-assessed income tax revenue payments, it’s being outpaced by spending on public services, benefits and debt payments.

“Although debt interest costs were lower than in recent months, they are stubbornly higher than a year ago, which is keeping the new Prime Minister in a highly tricky position.

“It comes at a time when Andy Burnham is under pressure to deliver more meaningful support to households facing a cost-of-living squeeze, but he’s still operating under the highly watchful eye of the bond market.

“This is the latest borrowing data to arrive under new Chancellor John Healey’s watch and it is likely to lead to difficult decisions at the Treasury.

“Signs of greater profligacy with taxpayers’ money could set off another spiral higher in borrowing costs, limiting available funds even further, given the eye-watering cost of servicing the debt.”