NEW Chancellor John Healey faces a fiscal squeeze ahead of his inaugural Budget as official figures showed government borrowing unexpectedly rose to £1.8 billion last month.

The Office for National Statistics said the increase in government borrowing in July was £700 million or 68.7 per cent higher than a year ago and confounded expectations.

Most economists had forecast zero borrowing last month while the independent fiscal forecaster, the Office for Budget Responsibility, had predicted a £500m surplus.

The borrowing hike came despite a record July for income tax receipts and shows the fiscal headache facing Mr Healey as he prepares his first Budget on October 28.

Thomas Pugh, chief economist at RSM UK, warned: “The commitment to sticking to the fiscal rules means further tax rises are inevitable come the autumn Budget.

“The risk is that more borrowing to spend fuels inflation and pushes up gilt yields further, leaving the new Chancellor having to borrow more just to stand still.”

Mr Healey said: “We are cutting the deficit faster than any other G7 economy while giving people a bit of breathing space with cost-of-living pressures.”