Chancellor Rachel Reeves saw a £3billion surge in Government borrowing last month as she sets her sights on tax rises in her first Budget this autumn.

According to the Office for National Statistics (ONS), public sector net borrowing stood at £3.1billion in July.

This was £1.8billion more than a year ago and the highest July borrowing since 2021.

The total for July was also £3billion more than predicted by the Office for Budget Responsibility (OBR) and higher than the £1.1billion most economists expected.

Since taking over at the Treasury, Ms Reeves has accused the Tories of leaving behind a £22billion ‘black hole’ in the public finances when they exited power.

But the Conservatives have claimed the Chancellor is using dire warnings about the state of Whitehall’s books as cover for long-planned tax rises.

There were fresh reports today that Ms Reeves is considering raising inheritance tax and capital gains tax at her Budget on 30 October in order to fill her coffers.

Ms Reeves has previously pledged not to raise income tax, national insurance or VAT, which has prompted speculation she could look to hike other levies.

In action blamed on the £22bn ‘black hole’, the Chancellor has already announced the controversial scrapping of winter fuel payments for millions of pensioners.

And she also has axed a series of infrastructure projects, while Labour plans to impose VAT on private school fees in January.

According to the Financial Times, Ms Reeves intends to hike social rents by more than inflation for the next decade.

According to the Office for National Statistics (ONS), public sector net borrowing stood at £3.1billion in July

Public sector net debt excluding public sector banks was provisionally estimated at 99.4 per cent of gross domestic product (GDP) at the end of July

The newspaper reported the Chancellor plans to introduce a 10-year formula that will increase annual rents in England by CPI inflation plus an additional 1 per cent.

The move is said to be aimed at encouraging the building of more affordable homes by providing certainty over cash flows for housing associations and councils.

The Local Government Association said a long-term settlement was ‘vital’ to ensure councils could regenerate their existing housing stock and invest in new stock.

But Polly Neate, chief executive of housing charity Shelter, said tenants also needed protection to ensure their rents remained affordable

‘As inflation can spiral out of control very quickly, there needs to be mechanisms in place to protect tenants from extreme rent rises that put them at risk of becoming homeless,’ she said.

The ONS figures released this morning showed borrowing – the difference between public sector spending and income – in the financial year from the end of March to July was £51.4billion.

This was £500 million less than in the same four-month period a year earlier, but the fourth highest year-to-July borrowing since monthly records began in January 1993.

The ONS figures showed that public sector spending of £107.4billion last month – up £3.5billion year-on-year – far outweighed receipts of £91billion in what is normally a bumper month for tax revenues.

Darren Jones, the Chief Secretary to the Treasury, said: ‘Today’s figures are yet more proof of the dire inheritance left to us by the previous government.

‘A £22billion black hole in the public finances this year, a decade of economic stagnation and public debt at its highest level since the 1960s, with taxpayers’ money being wasted on debt interest payments rather than on our public services.’

Jessica Barnaby, deputy director for public sector finances at the ONS, said: ‘Revenue was up on last year, with income tax receipts in particular growing strongly.

‘However, this was more than offset by a rise in central Government spending where, despite a reduction in debt interest, the cost of public services and benefits continued to increase.’

Experts warned that Ms Reeves would not be spared from ‘tough choices’ at her first Budget, despite figures last week showing the UK economy grew by 0.6 per cent between April and June as it expanded for a second successive quarter.

Isabel Stockton, senior research economist at the Institute for Fiscal Studies, said: ‘The early signs are that better-than-expected growth figures won’t be enough save Rachel Reeves from tough choices in her first Budget on October 30.

‘The combination of in-year spending pressures identified at last month’s spending audit and the ongoing, and well known, pressures facing many public services suggest that the accompanying spending review for 2025-26 could be a particularly difficult exercise.’

Cara Pacitti, senior economist at the Resolution Foundation, said: ‘With borrowing £3billion higher-than-expected in July, the deteriorating state of the public finances illustrate the challenges that Rachel Reeves will face ahead of her first Budget this Autumn.

‘The fiscal inheritance facing the Chancellor is one of rising taxes, increasing spending challenges, and very little wriggle room in the event of bad economic news.

‘This combines to create a challenging backdrop for the new Government to realise its ambitions of boosting growth while putting the public finances on a sustainable path.’

Despite slashing winter fuel payments for pensioners and axing a series of road, rail and hospital investment projects, Ms Reeves has recently splurged cash on a series of new pay deals for public sector workers.

John O’Connell, chief executive of the TaxPayers’ Alliance campaign group, said: ‘Taxpayers will be dismayed as Rachel Reeves prioritises public sector pay hikes over economic prudence.

‘The Chancellor claimed she was committed to having debt falling as a share of Britain’s GDP but these latest figures show where her real priorities lie.

‘The clock is ticking on this Government to deal with our crippling debt and prove that they’re on the side of hard-working families’.