UK July deficit hits £1.8B as spending outpaces record tax take

Britain's government ran a £1.8 billion budget deficit in July, defying forecasts for a balanced month, as inflation-driven spending on social benefits and goods outpaced record self-assessment tax receipts.

"We expect government borrowing to exceed the OBR forecast over the rest of the year as spending continues to rise," said Thomas Pugh, chief economist at tax and consulting firm RSM.

The Office for National Statistics said central government expenditure on social benefits rose £2 billion from a year earlier, while goods and services spending — including staff costs — climbed £1.2 billion. Self-assessed income tax receipts hit a record £17.1 billion for July, up £1.7 billion year over year. The June deficit was revised down to £12.8 billion from £16.0 billion.

The shortfall tightens the fiscal constraints facing Chancellor John Healey ahead of his first budget on Oct. 28, with 10-year gilt yields up roughly half a percentage point since the start of the year and the U.S.-Iran war threatening to keep global inflation elevated.

Borrowing for the first four months of the 2026/27 financial year totaled £56.7 billion, down £6 billion from the same period last year but £2.3 billion above the Office for Budget Responsibility's projection of £54.4 billion. The current budget deficit — which measures day-to-day spending against tax revenues and must be balanced by 2029/30 under current fiscal rules — stood at £34.7 billion over April-July, below the OBR's £36.7 billion forecast.

The OBR expects the deficit to fall to 3.6 percent of GDP this year from 4.3 percent in the last fiscal year. Pugh said borrowing is on course to remain above 4 percent of GDP, citing higher gilt yields, stubborn inflation, and a government determined to spend more. By contrast, the U.S. deficit has hovered around 6 percent of GDP in recent years and is not expected to fall significantly below that level.

Gilt yields squeeze fiscal headroom

Ten-year gilt yields have risen roughly 50 basis points since the start of the year, partly reflecting the U.S.-Iran war's impact on global inflation expectations and elevated U.S. government borrowing. The UK's debt stock of £2.98 trillion — equivalent to 94 percent of GDP, up £96 billion from a year earlier — means small moves in interest rates carry outsized costs. The debt interest bill was £700 million higher in July than a year ago, and an ONS statistician said he expects this to rise sharply in September data.

"Ten-year gilt yields are above 5 percent, reflecting energy-related inflation concerns, and these will gradually feed through into a larger debt-interest bill as existing debt is refinanced," said Martin Beck, chief economist at consultancy WPI Strategy. "At the same time, the government faces pressure to loosen inherited spending plans, meet unfunded defence commitments and deliver on its own ambitions for housing, infrastructure and public services."

At the March spring statement, then-chancellor Rachel Reeves had roughly £23.6 billion of headroom against the government's fiscal rules. Analysts believe a significant portion may have been eroded by higher inflation, slower growth, and rising bond yields. Healey will also need to fund an additional £1.2 billion a year for the defence investment plan — a commitment that prompted his resignation as defence secretary in June.

Revisions offer some relief

The ONS has revised down its estimates for public sector net borrowing compared with initial readings in every month this calendar year. Borrowing in May and June was revised down by £7.5 billion combined, suggesting the fiscal picture could improve as more data becomes available.

"Fiscal discipline is the bedrock of our UK economic stability and national security, which is why we are committed to meeting our fiscal rules, with a buffer against global uncertainties," Healey said in a statement.

Investors worry that Prime Minister Andy Burnham will increase spending without matching tax increases. "Mr. Burnham has made little secret of his desire to reform social care and boost homebuilding, both of which will require large sums of investment," wrote Rob Wood, an economist at Pantheon Macroeconomics, in a note to clients.

The OBR forecasts that outstanding debt relative to annual economic output will rise in this and the two subsequent fiscal years before falling slowly. Competition for funds is also intensifying from a new source: businesses are increasingly borrowing to finance artificial intelligence development and deployment, adding upward pressure on global borrowing costs.

This article is for informational purposes only and does not constitute investment advice.