The government borrowed the least amount of money in three years last month, official figures showed, in a surprise bout of good news for Chancellor Rachel Reeves.

Not since July 2021, in the midst of the COVID-19 pandemic, was state borrowing so low, according to data from the Office for National Statistics (ONS).

Increases in tax and national insurance receipts meant public sector net borrowing was £1.1bn in July, meaning there was a £1.1bn gap between government spending and income.

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That borrowing is less than half the figure (£2.6bn) expected by economists polled by the Reuters news agency, as self-assessed income tax was £600m higher than expected.

But borrowing was still £6bn higher in the first four months of the financial year, which started in April, than the same period in 2024.

Despite a £2.3bn drop in monthly borrowing when July 2025 is compared with July 2024, the state still spent more on the cost of that lending.

The amount of interest paid on government debt was £7.1bn, £200m more than a year earlier.

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The cost of government borrowing has increased in recent months as the interest rate investors demand on loans issued to the UK (bonds) rose.

At the start of the week, the government’s long-term borrowing cost, as measured by the interest rate on 30-year bonds (known as the gilt yield), closed at the highest level since 1998.

What does it mean for the chancellor?

The monthly borrowing data is in line with the predictions made by independent forecasters, the Office for Budget Responsibility (OBR).

It may not be as rosy a picture, however, as research firm Capital Economics point out the cumulative budget deficit, rather than a monthly figure, is £5.7bn above the OBR’s forecast.

This matters for the chancellor’s self-imposed fiscal rules, to bring down government debt and balance the budget by 2030, the firm said.

“The chancellor will probably need to raise taxes by £17bn to £27bn at the budget later this year,” Capital Economics’ UK economist Alex Kerr said.

Elevated self-assessment income tax receipts “may just reflect the timing of tax returns being recorded, and receipts in August may be weaker than expected”, he added.

Responding to the figures, Ms Reeves’s deputy, chief secretary to the Treasury, Darren Jones, said: “Far too much taxpayer money is spent on interest payments for the longstanding national debt.

“That’s why we’re driving down government borrowing over the course of the parliament – so working people don’t have to foot the bill and we can invest in better schools, hospitals, and services for working families.”

Two Labour-run councils are considering legal action to stop the use of hotels to house migrants in their areas after Epping council won a temporary injunction.

The leaders of Wirral and Tamworth councils both say they are considering their legal options in the wake of the Epping case, citing similar concerns about the impact of the hotels on their local communities.

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Epping Forest District Council won an interim High Court injunction on Tuesday to stop migrants being housed at The Bell Hotel, after arguing its owners did not have planning permission to do so.

Paula Basnett, the Labour leader of Wirral council, said: “We are actively considering all options available to us to ensure that any use of hotels or other premises in Wirral is lawful and does not ride roughshod over planning regulations or the wishes of our communities.”

She added: “If necessary, we will not hesitate to challenge such decisions in order to protect both residents and those seeking refuge.”

Carol Dean, the Labour leader of Tamworth Borough Council, said she understands the “strong feelings” of residents about the use of a local hotel to house asylum seekers.

She pointed out that under the Labour government, the use of hotels has halved from 402 to 210, with the aim of stopping the use of any hotels by 2029.

But in light of the Epping case, she said “we are closely monitoring developments and reviewing our legal position”.

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Other Tory councils are also being encouraged to follow Epping’s lead by party leader Kemi Badenoch.

She has sent a letter to all the councils they control, pledging her support for them to fight migrant hotels.

She wrote: “The Epping hotel injunction is a victory for local people led by a good Conservative council working hard for their community. This is the difference Conservatives in local government deliver. Real plans. Real action.”

Conservative-run Broxbourne Council has announced it is exploring its legal options.

The Reform UK leader of Kent County Council has also said she was writing to fellow leaders in Kent to explore whether they could potentially take legal action.

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Government under pressure

The prospect of more rulings in favour of councils will leave ministers asking where else they might be able to house asylum seekers. Other options may include flats and ex-army bases.

The prime minister and the home secretary are under huge pressure to clear the asylum backlog and stop using hotels across the country to house those waiting for their applications to be processed.

Protests have sprung up at migrant hotels across the country. But The Bell Hotel in Epping became a focal point in recent weeks after an asylum seeker housed there was charged with sexually assaulting a 14-year-old girl.

The council sought an interim High Court injunction to stop migrants from being accommodated at the hotel, owned by Somani Hotels Limited, on the basis that using it for that purpose contravened local planning regulations.

The interim injunction demanded that the hotel be cleared of its occupants within 14 days, but in his ruling on Tuesday, Mr Justice Eyre granted the temporary block, while extending the time limit by which it must stop housing asylum seekers to 12 September.

Somani Hotels said it intended to appeal the decision. Its barrister, Piers Riley-Smith, argued it would set a precedent that could affect “the wider strategy” of housing asylum seekers in hotels.

Epping hotel ‘sidestepped public scrutiny’

A government attempt to delay the application was rejected by the High Court judge. Home Office barristers had argued the case had a “substantial impact” on the government performing its legal duties to asylum seekers.

But Mr Justice Eyre dismissed the Home Office’s bid, stating that the department’s involvement was “not necessary”.

The judge said the hotel’s owners “sidestepped the public scrutiny and explanation which would otherwise have taken place if an application for planning permission or for a certificate of lawful use had been made”.

Reacting to Tuesday’s judgment, border security minister Dame Angela Eagle said the government will “continue working with local authorities and communities to address legitimate concerns”.

She added: “Our work continues to close all asylum hotels by the end of this parliament.”