UK Borrowing Overshoots in Warning to New Burnham Government

John Healey in Downing Street on July 20. Photographer: Chris J. Ratcliffe/Bloomberg Photo by Chris J. Ratcliffe /Bloomberg

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(Bloomberg) — Britain borrowed more than forecast in the first three months of the fiscal year, a reminder to new Chancellor of the Exchequer John Healey of the challenges he faces to keep the public finances on track.

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The budget deficit came in at £57.6 billion ($77.5 billion) between April and June — £2.7 billion more than the Office for Budget Responsibility forecast in March.

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The overshoot came despite an improvement in June that saw the deficit fall by almost £8 billion to £16 billion. The monthly shortfall was less than the £17.8 billion economists were forecasting, though the decline was largely driven by a sharp drop in debt costs that is not expected to be repeated. Revisions to April and May also helped curtail the cumulative deficit.

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Healey takes over a slow-growing economy that is struggling to generate the tax revenue needed to keep pace with rising spending on debt interest, public services, investment and welfare benefits. 

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Prime Minister Andy Burnham’s surprise decision to pick Healey for chancellor has fueled speculation about a further boost for military spending and who will pay for it. 

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Just six weeks ago, Healey resigned as defense secretary in a row over funding with the Treasury. However, the general assessment is that he represents a safe pair of hands who will stick to the UK’s fiscal rules. Healey was voted the second most investor-friendly option for chancellor in a Bloomberg survey of market participant clients behind former Health Secretary Wes Streeting. 

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Although the figures from the Office for National Statistics underscored the scale of the challenge Healey faces, there were some promising signs. Borrowing in the first two months of the year was revised down by £4.8 billion and the June outturn alone was slightly better than the OBR forecast.

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A £5.3 billion fall in debt interest costs in June compared with last year drove the monthly improvement but there were also big increases in VAT, income tax and corporation tax receipts. Those were partially offset by a steep increase in welfare spending. 

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“June’s borrowing figures are a welcome confidence boost for the new government, but they should not be mistaken for a turning point,” said Martin Beck, chief economist at WPI Strategy. “That offers the new chancellor some welcome breathing space after a difficult start to the financial year.”

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Revenue in the first three months was £2.4 billion higher than the OBR forecast. However, spending overshot by £3.6 billion.

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Healey inherits his predecessor Rachel Reeves’ fiscal rules and, on that basis, remains off track. Her main goal is to balance the current budget in 2029-30. It was £42 billion in deficit after the first three months, £1.3 billion above the OBR forecast.