Rachel Reeves set out her economic dogma early on in her parliamentary career, during a debate in 2010 on the state of Britain’s economy after the financial crisis. “I have great concerns about what the government have outlined today,” she told the House of Commons as George Osborne was preparing to launch years of austerity. “International evidence shows that hasty cuts will derail growth.”

Figures set to be published on Wednesday will shape the narrative about how much fiscal firepower Britain’s first female chancellor has at her disposal for the budget on October 30. Analysts expect the Office for National Statistics to say that the government borrowed £1.9 billion in July, above the Office for Budget Responsibility’s projection but down sharply from the £14.5 billion figure in June, thanks to the usual influx in tax receipts during the month.

So far this year, borrowing has already exceeded the OBR’s forecasts by £3.2 billion. Nevertheless, conditions have improved since it last produced a forecast for the economy in March. Growth has been punchier than anticipated, the Bank of England has lowered interest rates for the first time in more than four years and inflation is back to about its target, although it did rise to 2.2 per cent in July, from 2 per cent.

Higher debt levels and weak underlying growth have increased the public finances’ exposure to changes in interest rates, making it difficult for chancellors to substantially cut taxes or to lift spending without breaching their fiscal rules.

Traders in financial markets believe that the Bank will cut rates twice more this year, taking the base rate down to 4.5 per cent from 5 per cent. There is, they think, a 50-50 chance that rates will fall at the Bank’s next ratesetting meeting on September 19.

Reeves has said that she will stick to the present targets of getting debt as a share of GDP falling in five years and of balancing the current budget. However, she has hinted at tweaking the debt definition used in the rules, which may release £16 billion of cash. Headroom against the targets was estimated at £8.9 billion after the budget in March.

Analysts at Investec said: “Significant deviations in [borrowing] from what the OBR had factored in for the March budget will affect the headroom Reeves has to work with when it comes to her own autumn budget.”

Alex Kerr, at Capital Economics, the consultancy, said: “We think borrowing overshot the OBR’s forecasts once again in July, perhaps by £2.4 billion. That would probably fuel the narrative of the difficult decisions the chancellor faces.”

James Smith, developed markets economist at ING, the Dutch bank, said: “The public finance backdrop is tight and we suspect Reeves will be looking at a range of tweaks to minor taxes and reliefs, as well as potential changes to the fiscal rules.”

The chancellor is expected to raise taxes in her inaugural budget after warning of a £21.9 billion government overspend, part of which was inherited from the previous Conservative government. The largest contribution to that overspend was Reeves’ own decision to grant a £9.4 billion pay increase for public sector workers. Train drivers are in line for a 14 per cent pay bump.

Unprotected government departments, such as local councils and the justice system, are facing about £20 billion of real terms budget cuts. The chancellor abolished several investment projects when announcing her “fiscal audit”.

Responding to GDP figures last week that showed the economy had expanded by 0.6 per cent in the three months to the end of June, Jeremy Hunt, the former chancellor, said that Reeves’ attempt to “blame her economic inheritance on her decision to raise taxes, tax rises she had always planned, will not wash with the public”.

It is unclear which specific taxes Reeves could raise, although there is speculation that she will look to increase revenues from capital gains tax. She has ruled out lifting the main rates of income tax, national insurance and VAT, as outlined in the Labour general election manifesto.

Before the next budget, the Bank will announce its latest interest rate decision and, more crucially, the amount of government bonds it plans to sell over the next year as part of its quantitative tightening programme. If the central bank decides to scale back disposals from the present pace of £100 billion a year, Reeves would receive a fiscal boost. Under the existing regime, the Treasury covers any losses that the Bank incurs when selling the bonds, which could reach an estimated £90 billion. Fewer bonds being disposed of would reduce Treasury payments to the Bank in the near term.