Key Takeaways:
UK public borrowing dropped by a third in June as lower inflation reduced interest costs, though the deficit still ran ahead of official forecasts as Andy Burnham took office.
UK government borrowing fell to £16 billion in June, down 33% from a year earlier, as declining inflation slashed interest payments on the country's inflation-linked debt — though the deficit still exceeded the fiscal watchdog's projections for the fiscal year to date.
"The improvement is welcome, but the fact that year-to-date borrowing is running above the OBR's forecast shows the new government inherits a fiscal position that leaves little room for error," said James Okafor, macro analyst at Edgen.
The Office for National Statistics said Tuesday that borrowing for the fiscal year to date totaled £57.6 billion, £2.7 billion above the Office for Budget Responsibility's projections. Interest payments fell to £11.8 billion, down £5.3 billion from June 2025, reflecting the drop in the retail price index — to which a large share of UK government debt is linked. For the full fiscal year ending April 2027, the OBR expects borrowing of £115.5 billion, down from £129 billion in the prior year.
The mixed fiscal picture confronts new Prime Minister Andy Burnham, who named former defense minister John Healey as his treasury chief late Monday. Burnham has promised a 10-year economic plan that investors worry could require higher borrowing to fund growth initiatives, adding uncertainty to the outlook for UK gilts.
The June data marks the second consecutive month of declining year-over-year borrowing, extending a trend that has narrowed the deficit to its smallest since the Covid-19 pandemic. In the fiscal year that ended in April, the government reduced the gap between spending and revenue to its lowest level since the pandemic-era surge, when borrowing peaked at more than £300 billion.
The decline in interest costs reflects a structural feature of the UK's debt profile: inflation-linked gilts account for a larger share of outstanding government debt than in most other advanced economies. As the retail price index has fallen from double-digit peaks in 2022 and 2023, the coupon payments on these securities have declined sharply. In June 2025, when RPI was still elevated, interest costs stood at £17.1 billion — nearly 45% higher than the current reading.
Burnham takes office with the economy growing modestly but the public finances under strain from high debt-servicing costs, an aging population, and pressure for increased public investment. The new prime minister has pledged to present a 10-year plan later this year offering "a new political model and a new economic model," though he has provided few specifics on how he would reconcile growth ambitions with fiscal discipline.
The yield on the 10-year UK gilt has risen about 15 basis points since the start of the year, reflecting investor caution about the fiscal outlook under the new administration. The pound has traded in a narrow range against the dollar, with traders awaiting clarity on the government's fiscal strategy. The OBR's next full fiscal forecast is expected alongside the autumn budget, which will provide the first formal test of Burnham's fiscal credibility.
This article is for informational purposes only and does not constitute investment advice.
