The pound fell towards its lowest level this year amid predictions that Britain's borrowing bill would soar to £170bn and a string of dire economic data triggered a sterling sell-off.
Official figures showed the government borrowed £4.9bn in July to plug the gap between tax revenues and spending. This is £4.7bn higher than expected by the Office for Budget Responsibility (OBR), and comes amid a 63pc jump in debt interest costs.
While separate retail sales figures showed a surprise increase in July, the pound fell by more than 1pc against the dollar to $1.1792 amid gloomy consumer confidence data that hit investor sentiment.
Analysts described the rise in retail sales as a “last hurrah” for shoppers before the cost of living starts to bite.
Sales volumes rose by 0.3pc in July compared with a month earlier, according to the Office for National Statistics (ONS). Online deals boosted sales, even as purchases of big-ticket items like fridges and other household goods fell.
Richard Lim, chief executive of Retail Economics, said: “The amount of spare cash families have left after paying for essentials is evaporating fast. It feels like this is the last hurrah before the impact of rising interest rates and rocketing inflation chokes spending further.”
The annual deficit currently stands at £55bn, but economists expect the Government to borrow more later this year to help families deal with soaring energy bills amid the war in Ukraine.
Foreign Secretary Liz Truss, who is vying to succeed Boris Johnson as prime minister, has pledged to reverse a £13bn rise in National Insurance payments introduced by former chancellor Rishi Sunak.
She has also pledged to temporarily scrap green levies and on energy bills, which would be worth around £320 per household.
Pantheon Macroeconomics said it expected the combination of extra support, surging inflation and a recession to cause government borrowing to hit £170bn this year, in contrast to £99bn forecast by the OBR.
Investec said government energy bill subsidies alone could cost the Exchequer up to £62bn if they chose to shield all households from the increases starting in October, adding further to Britain's borrowing bill.
Philip Shaw, an economist at Investec, said: “Against what is becoming a much more difficult fiscal background, we judge that any move to cut the general level of taxes [or reverse tax increases] in the near-term would be playing with fire.”
Mr Sunak has warned that Ms Truss's plans will make the dire economic situation worse, warning of “misery for millions” by pouring “fuel on the fire” by raising inflation.
However, Ms Truss has insisted a recession was “not inevitable”. She said last week: “What I care about is Britain being successful. I don’t agree with these portents of doom. I don’t agree with this declinist talk.”