By William Schomberg

LONDON (Reuters) -Britain borrowed more than expected in October, according to official data that showed the challenge facing finance minister Rachel Reeves who says she will fix the public finances as well as increase spending sharply.

In October alone, public sector net borrowing stood at 17.4 billion pounds ($22.0 billion), the Office for National Statistics said on Thursday.

That was above all forecasts in a Reuters poll of economists and was the second-biggest October borrowing total since records began in 1993.

Alex Kerr, an economist with consultancy Capital Economics, said the data showed how little wiggle room Reeves had to significantly increase spending on public services.

“While the chancellor has downplayed the chances of further tax-raising measures, if she wants to increase day-to-day spending in future years, she may need to raise taxes to pay for it,” Kerr said.

Deputy finance minister Darren Jones said: “This government will never play fast and loose with the public finances. Our new robust fiscal rules will deliver stability by getting debt down while prioritising investment to deliver growth.”

In the first seven months of the tax year, borrowing totalled 96.6 billion pounds, 1.1 billion pounds higher than in the same period a year earlier.

Many of the above-inflation increases in public sector pay that were one of the first policy announcements of Prime Minister Keir Starmer’s new government shortly after winning July’s election came into effect in October.

In October alone, overall day-to-day spending was up by nearly 5% with staff costs up by 13.5%.

Government receipts rose by 3.7% in October.

Reeves last month announced the biggest tax increases in three decades – most of them from higher social security contributions paid by employers – as she promised to balance day-to-day spending with tax revenues by the end of the decade.

But her plans will also see borrowing rise sharply in the coming years as the new Labour government seeks to improve public services and invest more in infrastructure than had been planned by the previous Conservative administration.

Reeves announced a change of the fiscal rules for her new government, targeting public sector net financial liabilities (PSNFL) instead of public sector net debt excluding the Bank of England (PSND-ex).

The change will give the government more leeway to borrow for investment.

The ONS said PSNFL stood at 83.7% of gross domestic product in October, up from 81.2% in October last year and compared with 90.2% for PSND-ex.

Reeves is aiming to have PSNFL falling as a share of the economy in the 2029/30 financial year.

($1 = 0.7908 pounds)

(Writing by William Schomberg; Editing by Muvija M, Paul Sandle and Alison Williams)

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