Key Takeaways:
Britain borrowed £23.3 billion in May, the second-highest on record for the month, as surging interest payments on inflation-linked debt blew a £5.6 billion hole in the government's fiscal plans.
The Office for National Statistics said Friday that public sector net borrowing rose 30% from a year earlier, exceeding all economists' forecasts in a Reuters poll that had pointed to a little-changed reading of £18.5 billion. The overshoot was driven by a 54% jump in debt-servicing costs to £4.1 billion, reflecting the UK's unusually large stock of inflation-linked gilts.
"The big picture is that the public finances are fragile," said Ruth Gregory, an economist at Capital Economics. "This will constrain whoever is prime minister."
The borrowing figure was £5.6 billion above the £17.7 billion forecast by the Office for Budget Responsibility in March, pushing the fiscal year-to-date deficit to £46.3 billion — £7.7 billion above the watchdog's projection after just two months. Pantheon Macroeconomics estimates borrowing would exceed £136 billion for the full year if the April and May overshoots persist, compared with the OBR's £115.5 billion forecast.
The deterioration comes as Prime Minister Keir Starmer faces a leadership challenge from Andy Burnham, the mayor of Manchester who won a comfortable by-election victory Thursday in the Makerfield constituency. Burnham has publicly backed the government's existing fiscal rules, which target a balanced current budget by 2029-30, but the worsening numbers leave Finance Minister Rachel Reeves with rapidly shrinking headroom. The OBR estimated in March she had just £24 billion of leeway for that target year.
UK gilt yields rose in early trading after the release, with the 10-year yield climbing to 4.799% and the 30-year yield reaching 5.5%. Last week, Britain sold £9 billion of 15-year debt at the highest yield since at least 1998, signaling growing investor unease about the fiscal trajectory.
Public sector net debt stood at 95.1% of gross domestic product, a level last seen in the early 1960s. While down from a pandemic peak of 98% in 2020, the ratio remains among the highest in the G7 and leaves the government acutely exposed to further increases in inflation or interest rates.
The UK's heavy reliance on index-linked debt — a larger share than most advanced economies — means that even modest inflation increases translate directly into higher debt-service costs. Retail price inflation stood at 3.1% in May and is expected to rise further as the Middle East conflict pushes up energy prices. The ONS said debt costs were likely to rise further in next month's data.
The borrowing figures compound a weak economic backdrop. The UK economy contracted in April after a strong start to the year, reflecting weaker household and business confidence and higher energy costs. The OECD expects the economy to grow just 0.9% in 2026, a sharp slowdown from 1.4% in 2025 and below the OBR's 1.1% forecast. Slower growth would further weaken tax revenues, widening the deficit.
Shadow Chancellor Mel Stride said borrowing was "out of control," pointing to the 30% year-on-year increase. The government is also struggling to finance additional defense spending within existing budget rules, prompting Defence Minister John Healey to resign in protest last week.
"Several questions remain over whether the current plans will be sufficient to reduce public borrowing," said Matt Swannell, chief economic adviser at the ITEM Club.
The next OBR forecast, due around the end of the year, will provide the first official reassessment of whether the government remains on track to meet its fiscal targets. If the watchdog downgrades its growth outlook or raises its borrowing projections, Reeves would face pressure to announce tax increases or spending cuts to restore credibility with bond markets.
This article is for informational purposes only and does not constitute investment advice.
