Introduction: UK borrowing undershoots forecasts
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
Britain’s government borrowing has decreased in the first full fiscal year under the Labour government, falling slightly below forecasts.
New data released this morning by the Office for National Statistics (ONS) indicates that the UK borrowed £132 billion in the financial year ending in March—nearly £20 billion less than the previous financial year ending in March 2025.
This figure is also £700 million less than the £132.7 billion forecast by the Office for Budget Responsibility (OBR) for the same period.
Both income tax and VAT revenues exceeded OBR expectations, while public sector spending was lower than anticipated.
The resulting borrowing undershoot may be welcomed by Chancellor Rachel Reeves, who will attend the official launch of the Retail Investing Campaign at the London Stock Exchange this morning. However, the ongoing conflict in Iran now poses a threat to her fiscal plans.
Martin Beck, Chief Economist at WPI Strategy, explains:
“Public sector borrowing was down on a year-on-year basis in March, leaving the full-year deficit broadly in line with the Office for Budget Responsibility (OBR)’s forecast.
But the OBR’s expectation that borrowing will continue to fall this year will be challenged by the fallout from the conflict in the Middle East. For now, however, the implications for the government’s fiscal rules remain limited.”
In March alone, the ONS reports, the UK borrowed £12.6 billion to cover the gap between public sector spending and income—£1.4 billion less than a year ago, marking the lowest March borrowing since 2022.
The agenda
- 7am BST: UK public finances for March
- 7:30am BST: UK’s retail investment campaign launches at London Stock Exchange
- 9am BST: Eurozone ‘flash’ composite PMI for April
- 9:30am BST: UK ‘flash’ composite PMI for April
- 11am BST: CBI industrial trends report
- 1:30pm BST: US initial jobless claims
UK public finances: what the experts say
City economists are cautioning that UK borrowing is likely to increase due to the Iran war, despite this morning’s modest drop in borrowing for the last financial year.
Lindsay James, investment strategist at Quilter, states:
“The conflict in the Middle East has shown the UK economy remains very exposed to geopolitical shocks. However, there are some encouraging signs that rigid fiscal rules have been having the desired effect thus far, as today’s public sector finance data shows borrowing was £12.6 billion in March. This is £1.4 billion less than the same month last year, and the lowest March reading since 2022.
Borrowing had been expected to be lower this year as the government had front loaded a lot of its spending plans into its early years, but things could get more difficult from here on out. With inflation on the rise, debt interest climbing again and gilt yields also becoming elevated once more, the fiscal headroom Chancellor Rachel Reeves had established could very quickly run out once again. As such, tax is likely to feature prominently as the lever to pull to help keep the public finances on steady ground, and we have already seen the burden this places on growth.”
Ruth Gregory, deputy chief UK economist at Capital Economics, warns:
“March’s figures showed an unexpected undershoot of the OBR’s forecast for public borrowing in 2025/26. But we do not expect this improvement to last long. We think the energy price shock will mean that borrowing overshoots the OBR’s forecast by a huge £29 billion for the 2026/27 fiscal year and by about £13 billion in subsequent years.”
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, predicts:
“The good news for the Chancellor is that full year borrowing for 2025/26 came in at £132 billion, down from £151.9 billion in the previous financial year, and in line with the latest OBR forecast. The bad news is that the war in Iran means the situation will deteriorate sharply over the rest of this year. That will limit her ability to offer households and businesses a significant bailout if energy prices move higher.
Looking ahead, March will probably be the last month of good news on borrowing. Gilt yields are down from their 5% peak in March, but are still significantly higher than before the war. Borrowing costs will rise quickly from here though, as higher interest payments on index-linked gilts weaken the near-term fiscal position. At the same time, the economy will almost certainly slow, which could send the unemployment rate trending back up. That would lower income tax receipts and raise welfare spending.”
Oil over $100 as strait of Hormuz remains blockaded
The price of oil is rising above $100 per barrel this morning as supplies through the Strait of Hormuz continue to be severely disrupted by the ongoing conflict in Iran.
Yesterday, Iranian forces seized two ships in this critical waterway while the US and its allies intensified their separate blockades of the shipping route.
Mohammad Bagher Ghalibaf, the speaker of the Iranian parliament and lead negotiator, stated late on Wednesday that reopening the Strait of Hormuz would be “impossible” while the US and Israel committed “flagrant” breaches of the ceasefire, including the US naval blockade, “the hostage-taking of the world’s economy” and “Zionist warmongering.”
This deadlock has cast doubt on whether stalled peace negotiations will resume.
Brent crude is currently up nearly 1% this morning, trading at $102.80 per barrel.
