UK government borrowing reached £16.6bn in September, marking the third-highest level for the month since records began, according to the Office for National Statistics (ONS).

The figure was £2.1bn higher than the same month last year, leaving chancellor Rachel Reeves in a difficult fiscal position ahead of the autumn budget.

While the borrowing figure came in below the £17.5bn forecast by many economists, concerns remain over the wider fiscal picture. Since the start of the financial year, total borrowing stands at £79.6bn —£1.2bn more than the same period in 2023 and £6.7bn higher than projections from the Office for Budget Responsibility (OBR), the UK’s independent fiscal watchdog.

The ONS also noted a decline in central government benefit payments for the first time since early 2022. This drop was attributed in part to Labour's recent policy decision to means-test the winter fuel allowance.

ONS deputy director for public sector finances Jessica Barnaby said: “Borrowing this month was about £2bn up on last year, making this the third-highest September figure on record.

Read more: Nearly half of business owners would look to exit UK if budget delivers tax hikes

"While tax revenue increased, this was outweighed by increased spending, partly due to higher debt interest and public sector pay rises.”

Shortly after taking office, the Labour government settled pay claims with junior doctors, and with train drivers, to end industrial action that had been hurting the economy. The ONS said central government departmental spending on goods and services increased by £2.6bn to £35.9bn, "as pay rises and inflation increased running costs".

Public sector debt was estimated to be at 98.5% of GDP, four percentage points higher than the same period last year.

The interest the Treasury has to pay on government debt rose from £4.6bn a year ago to £5.6bn last month, according to the ONS.

Lindsay James, investment strategist at Quilter Investors, said: “The UK’s finances are stretched close to breaking point, as public sector net debt excluding public sector banks estimated at 98.5% of GDP at the end of September 2024.

"This is an uptick of 4% compared to the same time last year. The last time such levels were seen was in the 1960s, when the Labour chancellor of the day was ultimately forced into a policy of tax increases and spending reductions," James added.

"Although Rachel Reeves has promised that the UK will not see a return to austerity, a series of tax increases in one form or another are all but guaranteed at next week’s budget. The chancellor has warned the UK public that there is a very large fiscal ‘black hole’ to be filled and has repeatedly indicated that difficult decisions will be necessary."

Read more: How the UK's capital gains tax compares with other countries

She said the Labour government would want to avoid a repeat of the negative reactions from financial markets in recent years to unfunded tax cuts and spending plans, "so the chancellor will need to be transparent when announcing any changes and the anticipated costs".

Meanwhile, the public borrowing figure for August was revised down from £13.7bn to £13bn.

Darren Jones, chief secretary to the Treasury, said: “We have inherited a £22bn black hole in the country’s public finances, including no plan to fund pay deals for millions of public sector workers.

“Strikes cost at least £3bn last year, so it was the right thing to do to end those damaging disputes.”

Alex Kerr, UK economist at Capital Economics, said: "This demonstrates the constraints on the chancellor’s ability to increase day-to-day spending in the budget next week without raising taxes.

“Indeed, we expect her to increase current (i.e. excluding investment) spending by a net £25bn a year and to fund that by raising taxes by £25bn.

“However, if the chancellor changes the measure of debt her fiscal rule targets, she may be able to borrow to increase public investment by up to £53bn. For what it’s worth, we think she will raise borrowing and public investment by £18bn in 2029/30.”

Reeves will deliver her autumn statement speech on 30 October.

Download the Yahoo Finance app, available for Apple and Android.