The fiscal deficit climbed to £77.3 billion — £8.1 billion more than the Office for Budget Responsibility (OBR) predicted in March. In August alone, borrowing came in higher than forecast at £18.3 billion. The OBR had predicted a deficit of £14.8 billion.

The figures highlight the challenges facing Healey as he prepares a budget that must both set out Prime Minister Andy Burnham’s economic vision while reassuring jittery bond markets than borrowing remains under control. 

Burnham has set out ambitious plans from defence and devolution to housebuilding and social care. However, his room for manoeuver is highly limited, with the rise in borrowing costs partly triggered by the Iran war already estimated to have wiped out half his fiscal headroom. 

Speculation is growing that the Burnham government will have to raise taxes to restore headroom to the £23.6 billion that existed before the Iran war and keep the faith of bond markets, where investors at one point this month pushed 10-year gilt yields to their highest in 19 years. 

With households facing the prospect of a huge increase in energy bills as the Middle East conflict drags on, Burnham is under pressure to come up with further measures to help people with the cost of living. He has admitted that the upcoming budget will be “challenging”.

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