The UK’s government borrowing has surpassed official forecasts by £6.6 billion this year, highlighting the fiscal challenges facing Rachel Reeves as she prepares for the upcoming budget.

As per the latest data from the Office for National Statistics, the government borrowed £16.6 billion in September, an increase of £2.1 billion compared to the same month last year, marking it as the third highest September deficit on record. Analysts had projected the deficit to be around £17.5 billion last month.

With this level of borrowing, the government now stands £6.6 billion above the Office for Budget Responsibility’s cumulative borrowing forecast of £73 billion for this year.

The forthcoming October budget will be the first presented by a female Chancellor in Britain, coinciding with a lackluster initial 100 days in office characterized by internal party disputes regarding the two-child benefit cap, public dissatisfaction with reduced winter allowances for pensioners, and a scandal involving freebies.

This announcement is set to initiate the initial phases of the government’s broader economic strategy, which will influence tax and spending policies for the next five years. Both Reeves and Prime Minister Sir Keir Starmer have emphasized the necessity for Labour to secure two parliamentary terms to rejuvenate the UK’s struggling public services and stimulate economic growth.

Darren Jones, Chief Secretary to the Treasury, remarked, “We have taken on a £22 billion deficit in the nation’s public finances, without a plan to finance pay settlements for millions of public sector employees. Addressing this deficit in next week’s budget will entail challenging decisions aimed at stabilizing our economy and fulfilling our promise for change.”

Cara Pacitti, a senior economist at the Resolution Foundation, noted that the borrowing overrun this year is primarily driven by central government expenditures that exceed expectations by £11.5 billion, largely due to public sector wage increases and escalating running costs.

Reeves previously announced a £9 billion pay deal that exceeds inflation for public sector workers in July, which, coupled with increased asylum-related spending inherited from the Conservatives, has contributed significantly to the £22 billion fiscal deficit.

Pacitti also mentioned that the ONS statistics underscore the substantial challenges in public finances that the Chancellor must navigate, balancing current overspending with the imperative to eschew future austerity and finance additional public service spending through tax increases.

Welfare expenditure ascended by £7.7 billion over the past year, reaching £154.2 billion, due to inflation-driven adjustments to welfare payments. The ONS reported that central government spending on goods and services increased by £10.1 billion to £209.6 billion, influenced by wage hikes and inflationary pressures on operating costs.

Tax revenues bolstered by £16.4 billion over the past year, totaling £490.6 billion, predominantly due to a £9.7 billion rise in income tax revenues.

The Chancellor is gearing up to announce a £40 billion fiscal tightening in the budget next Wednesday, aimed at reducing the government deficit. Most of this adjustment is expected to stem from tax increases, which may involve hikes in capital gains tax and adjustments to national insurance for employer pension contributions.

The ONS indicated that the debt-to-GDP ratio reached 98.5% in September, the highest since the 1960s. Government debt interest payments, impacted by rising interest rates, amounted to £5.6 billion in September, up from £1 billion in the same month last year.

Jessica Barnaby, deputy director for public sector finances at the ONS, stated, “This month’s borrowing reflects an increase of about £2 billion from the previous year, making it the third highest September figure recorded. While tax revenues have risen, they have been outweighed by heightened spending, driven in part by increased debt interest and public sector wage hikes.”

There remains a potential strategy for the Chancellor to counterbalance tax hikes with heightened public investment spending, which economists argue is essential for revitalizing the UK’s sluggish growth. She may be inclined to modify the public debt definition to encompass the value of government physical and financial assets, potentially easing fiscal targets by £50 billion. Such adjustments to fiscal regulations would establish the so-called golden rule, which mandates that day-to-day governmental expenditures must be financed through tax revenues.

Alex Kerr, a UK economist at Capital Economics, noted, “Should she amend fiscal regulations, there’s still potential for increasing public investment.”

The September fiscal data is unlikely to influence the Office for Budget Responsibility’s assessment of Reeves’s fiscal margin, as the fiscal watchdog has already concluded its economic forecast, set to be disclosed next Wednesday.

Recent reports indicated that cabinet ministers express concerns regarding the scale of budget reductions Reeves plans to implement. While funding for the NHS is likely to see real-term increases, government sectors that lack protection, such as local councils, may experience cuts in their financial allocations.

Jeremy Hunt, the previous Conservative Chancellor, was determined by the Office for Budget Responsibility to possess £8.9 billion of fiscal leeway following the last budget presented in March.