Chancellor John Healey suffered a blow to the public finances just weeks before the Budget.
Public sector borrowing - the difference between total public sector spending and income - was £18.3 billion in August 2026, above City predictions and the second-highest level for the month on record.
The figure was £2.9 billion (19.%) more than in August 2025 and £3.5 billion above the forecast by the Budget watchdog, the Office for Budget Responsibility (OBR).
Furthermore, the amount that central Government paid in interest on its debts was £8.8 billion in August, marking the highest figure for the month since records began.
This was partly a result of higher inflation pushing up the interest payable on Retail Prices Index (RPI)-linked Government bonds, known as gilts.
Responding to the figures, shadow Chancellor Andrew Griffith said: “Labour have lost control of the public finances.
“It takes a rare fiscal incontinence to both have the highest tax take in history and see borrowing still shoot up.”
But Chief Secretary to the Treasury Emma Reynolds said: “Britain has huge potential to deliver good growth in every postcode, creating jobs, raising living standards and investing in the services people rely on.
“But we can only deliver that growth with fiscal discipline.”
The bigger than expected borrowing figure was largely due to increased Government spending, partly due to the impact of stubbornly-high inflation, said the Office for National Statistics.
The grim data fuelled fears that Andy Burnham’s government will impose more tax rises.
Proposals are said to be “live” in the Treasury to cut the threshold for paying the “mansion tax” to £1.5 million, which could hit homeowners in London with a £624 million overalll bill for the new levy due to come into force in April 2028.
Mr Healey is also being urged to impose higher taxes on banks of tens of billions of pounds.
He is also believed to be considering changes to capital gains tax to rake in millions more for the Treasury, as well as possibe wealth levies which would impact hardest on the capital.
The latest figures came after a new report warned that Mr Healey will face pressure to raise taxes or cut spending at the Budget on October 28, as soaring borrowing costs because of the Iran war and weaker growth has wiped nearly £12 billion off the Government’s fiscal headroom.
The KPMG economic outlook estimates that Mr Healey could be left with headroom of about £12 billion in the autumn, down from £23.6 billion at the time of the spring forecast.
It said rising borrowing costs on the UK’s debt after the Middle East conflict has already cut about £9 billion off the headroom, with sluggish growth and expected downgrades from the OBR likely to to reduce it by about another £2 billion.
KPMG said: “The Chancellor will have limited scope to provide significant support for growth or the cost of living when the Budget is delivered next month, as higher borrowing costs and weaker growth have reduced the Government’s fiscal headroom.
“Restoring the previous level of headroom could require tax rises or spending reductions.
“With the Government committed to not increasing taxes on working people, the Chancellor may need to consider other tax measures.”
Long-term borrowing costs have been surging amid a gilt sell-off driven by inflation worries caused by the Iran war and rising expectations of a rise in interest rates by the year end.
These factors will combine to leave Mr Healey with “limited room for manoeuvre” at his first Budget in just over a month’s time, KPMG said.
The group is predicting UK interest rates will likely rise in November, from 3.75% to 4%, hiking mortgage bills for homeowners, but then start falling back next summer as the impact of energy prices on inflation fades away.
