UK Posts Bigger-Than-Forecast Budget Deficit on Debt Costs

Rachel Reeves Photo by Dan Kitwood /Photographer: Dan Kitwood/Getty

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(Bloomberg) — Britain borrowed more than forecast in February, boosted by a surge in debt-interest costs even before turmoil hit bond markets following the outbreak of war in the Middle East.

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Spending exceeded tax revenue by £14.3 billion ($19.2 billion), the Office for National Statistics said on Friday. It was higher than the £8.8 billion shortfall predicted by economists and double the forecast the Office for Budget Responsibility made in November. It was the second-highest deficit for the month on record.

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Borrowing in the first 11 months of 2025-26 was £125.9 billion — £11.9 billion less than the same period a year earlier. It suggest the deficit in the fiscal year as a whole could overshoot the OBR’s new forecast of £132.7 billion.

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The public finances now risk being blown off course by the energy price shock triggered by war in the Middle East. Chief Secretary to the Treasury James Murray said following the figures that the UK’s public finances are “better prepared for a more volatile world.”

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However, the crisis has sent UK government borrowing costs soaring, raised the specter of renewed job losses and prompted calls for state support for squeezed households. It could make it hard for Chancellor of the Exchequer Rachel Reeves to deliver on her balanced-budget rule, with potential consequences in financial markets. 

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The deficit last month was boosted by higher debt-interest costs related to moves in the Retail Prices Index, a measure of inflation that affects index-linked gilts, and a £2 billion coupon payment that was pushed into February. That was compounded by increased spending on public services and benefits with an £10.8 billion increase in overall expenditure outweighing an £8.6 billion rise in tax receipts.

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Debt costs in February totalled £13 billion, a record for the month and up £5.5 billion from a year earlier. 

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“Interest rates cuts are inevitably deferred, inflation now looks set to pick up again, and growth remains subdued,” said Nabil Taleb, economist at PwC UK. “That combination risks putting renewed pressure on borrowing and leaves the public finances exposed, underlining just how quickly the fiscal picture can shift.”

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The UK enters the crisis with much higher debt levels than it did prior to the pandemic. The ONS said debt as a share of gross domestic product was at 93.1%, levels last seen in the early 1960s.

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In a speech earlier this week, the chancellor warned the latest geopolitical shock will likely “put upwards pressure on inflation in the months to come” and is a symptom of an “age of insecurity.”

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A weaker economy would erode the tax revenue generated from businesses and households. Meanwhile, government interest costs, a tailwind for the public finances overall this year, have gone into reverse since the US and Israel attacked Iran. The benchmark 10-year gilt yield is up around 60 basis points in the past three weeks, hitting levels last seen more than a year ago.

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Reeves could also need to outlay an expensive support package as consumers brace for another cost-of-living crisis. Petrol costs have risen by the most since 2022, lenders are hiking mortgages rates and experts believe the energy price cap will rise sharply in July if the current moves in oil and gas prices stick.

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The Greens — who are ahead of the ruling Labour party in some polls — have called for multibillion-pound support if household energy costs soar.

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