The Office for National Statistics (ONS) reported that UK public sector net borrowing was £16 billion in June, a 33.1% decrease compared to the same month last year. This decline was larger than expected, coming in £300 million below the Office for Budget Responsibility’s (OBR) forecast and £2 billion less than most economists had anticipated.
Lower inflation-linked debt interest costs
The reduction in borrowing was largely driven by lower inflation-linked debt interest costs compared with the previous year. The ONS noted that interest payable on government debt totalled £11.8 billion in June, 31% less than last year, though still the fourth highest June on record. This volatility is linked to gilts tied to the retail prices index (RPI) inflation.
First day relief for Chancellor Healey
The lower-than-forecast borrowing figure offered some respite to John Healey on his first day as Chancellor, appointed by new Prime Minister Andy Burnham on Monday. Healey responded by stating that “fiscal control” is his “first duty” and that “fiscal credibility is the bedrock for economic stability and for national security.” He added that the Prime Minister and he will work together to meet fiscal rules with a buffer against uncertainty and to make life more affordable for working people.
Tax receipts and spending trends
Strong growth in tax receipts, particularly from income-related taxes and VAT, helped reduce borrowing in June compared with the previous year. However, higher spending on public services and benefits more than offset the reduction in debt interest costs. The borrowing figure represents the difference between government spending and income from taxes and other sources.
Quarterly borrowing above forecast
Borrowing between April and June, the first three months of the financial year, was £56.7 billion, which is £2.7 billion above the OBR’s forecast. This amount represents 1.9% of the UK’s gross domestic product (GDP), marking the 10th highest period since comparable records began in 1993.
Economists warn of fiscal pressures
Dennis Tatarkov, senior economist at KPMG UK, said: “Borrowing for the first three months of the current financial year was £2.7 billion above the OBR’s March projections. However, any immediate action on the cost of living could further strain public finances. John Healey could face pressure to loosen purse strings, but sticking to existing fiscal rules means more tax revenues or spending cuts may be needed.”
Thomas Pugh, chief economist at RSM UK, commented on the VAT cut on electricity bills announced by Prime Minister Burnham: “The commitment to sticking to the fiscal rules means further tax rises are inevitable come the autumn budget. The risk is that more borrowing fuels inflation and pushes up gilt yields further, leaving the new chancellor having to borrow faster just to stand still.”
Policy measures and funding
Prime Minister Burnham announced on Tuesday that from October 1, energy bills will be VAT-free, a policy measure costing £850 million. This will be funded in part by scrapping the previous government’s digital ID project, estimated to cost about £600 million a year over three years. Former Chancellor Rachel Reeves’ fiscal rules aimed to pay for day-to-day government spending with tax revenues by the end of this decade.
