The United Kingdom borrowed a higher-than-anticipated £23.3 billion in May, driven by the economic repercussions of the Iran war. This figure underscores the fiscal challenges that await Andy Burnham if he assumes the Labour leadership.
Record Borrowing Levels
According to the Office for National Statistics (ONS), public sector net borrowing for May was the second highest ever recorded for that month. The data was released shortly after Burnham's victory in the Makerfield by-election.
Debt interest costs surged as financial markets reacted to the Middle East conflict, pushing borrowing £5.6 billion above the forecast published alongside Chancellor Rachel Reeves' spring statement in March. City economists had predicted a much lower £18.5 billion.
Tom Davies, a senior statistician at the ONS, noted: "Borrowing in the first two months of the financial year was nearly £9 billion higher than in the same period of 2025. Spending on debt interest, public services, investment, and benefits all increased in May 2026 compared with last May, more than outweighing higher tax receipts."
For the first two months of the fiscal year combined, borrowing stood at £46.3 billion—£8.9 billion higher than a year ago and £7.7 billion above Office for Budget Responsibility (OBR) forecasts.
Political Implications
Burnham is expected to challenge Keir Starmer for the Labour leadership following his by-election win. If successful, he would appoint a new chancellor, who must immediately address how to meet Reeves' fiscal rules and whether to fully fund the defence investment plan. The latter prompted Defence Secretary John Healey's resignation last week.
Potential candidates to replace Reeves include Energy Secretary Ed Miliband and Home Secretary Shabana Mahmood. The new leadership may also face pressure from bond markets wary of changes to growth and taxation policies.
Martin Beck, chief economist at WPI Strategy, warned: "The danger for Labour is that political uncertainty starts to carry a fiscal price. If investors begin to price in larger deficits or stickier inflation, gilt yields could move higher again, feeding directly into mortgage rates and debt interest costs."
Economic Drivers
The ONS attributed the borrowing overshoot to higher-than-expected inflation, which increased the cost of public services and raised interest payments on inflation-linked government bonds. The Bank of England, which held interest rates at 3.75% on Thursday, had expected inflation to fall close to its 2% target in the spring. However, rising fuel prices due to the Middle East war stalled progress, leaving inflation at 2.8% last month. Reeves condemned the conflict as a "folly."
Debt interest payments reached £11.7 billion in May, up £4.1 billion from a year ago. Despite a £3.4 billion (4.1%) increase in tax revenues to £85.5 billion, driven by VAT and income tax, borrowing still rose.
Government debt levels also exceeded OBR projections, hitting 95.1% of gross domestic product—0.7 percentage points higher than the spring forecast.
Chief Secretary to the Treasury Lucy Rigby responded: "Inflation has held steady and unemployment has fallen this week, but the war in the Middle East has clearly impacted economies worldwide. We have the right economic plan to deal with these challenges."
