UK borrows more than expected as impact of Iran war takes toll | Government borrowing
The United Kingdom recorded £23.3 billion in public sector net borrowing for May 2026, marking the second-highest figure for the month on record. According to the Office for National Statistics (ONS), this borrowing overshoot was driven by increased spending on debt interest, public services, and benefits, alongside fiscal pressures linked to the conflict in the Middle East.
Fiscal Pressures and Borrowing Trends
Public sector borrowing in May exceeded the forecast published in Chancellor Rachel Reeves’s spring statement by £5.6 billion. City economists had anticipated a lower figure of £18.5 billion. Tom Davies, a senior statistician at the ONS, noted that borrowing for the first two months of the current fiscal year reached £46.3 billion, a total £8.9 billion higher than the same period in 2025.
The ONS attributed the rising costs to higher-than-expected inflation, which increased the expense of delivering public services and boosted interest payments on inflation-linked government bonds. Debt interest payments alone reached £11.7 billion in May, an increase of £4.1 billion compared to the previous year. Government debt now stands at 95.1% of GDP, exceeding Office for Budget Responsibility (OBR) projections by 0.7 percentage points.
Despite the rise in borrowing, tax revenues in May reached £85.5 billion, an increase of £3.4 billion or 4.1% compared to the same month in 2025, driven by growth in both income tax and VAT receipts.
Political Uncertainty and Economic Outlook
The latest figures arrive as Andy Burnham is expected to challenge Keir Starmer for the Labour party leadership following his recent byelection victory in Makerfield. Should Burnham assume leadership, any incoming chancellor would immediately face the challenge of adhering to existing fiscal rules while addressing the funding of the defence investment plan, a policy that led to the resignation of defence secretary John Healey.
Potential candidates to replace Reeves include energy secretary Ed Miliband and home secretary Shabana Mahmood. Market analysts warn that political instability could exacerbate these fiscal challenges. Martin Beck, chief economist at WPI Strategy, stated that if investors anticipate larger deficits or persistent inflation, gilt yields could rise, directly impacting mortgage rates and the cost of debt interest.
The interplay between geopolitical conflict and domestic fiscal policy remains a primary concern for market stability. As the Bank of England maintains interest rates at 3.75%, the persistent 2.8% inflation rate—fueled by rising energy costs—creates a difficult environment for the Treasury. Any shift in leadership may invite scrutiny from bond markets, where investors remain sensitive to changes in growth projections and taxation strategies.
Inflation and Global Economic Impact
While the Bank of England held interest rates at 3.75% on Thursday, progress toward the 2% inflation target has been stalled by energy price volatility stemming from the Middle East conflict. Lucy Rigby, the chief secretary to the Treasury, acknowledged the global impact of the conflict while maintaining that the current economic plan is suited to addressing these challenges.
The divergence between ONS data and OBR forecasts highlights the volatility currently facing the Treasury. With borrowing £7.7 billion ahead of OBR forecasts for the first two months of the fiscal year, the incoming administration may face immediate pressure to reconcile public spending demands with the reality of higher debt-servicing costs.
Frequently Asked Questions
Why was borrowing higher than expected in May?
Borrowing reached £23.3 billion, which was £5.6 billion higher than the forecast. The ONS stated this was due to increased spending on debt interest, public services, investment, and benefits, coupled with inflation-linked costs.
What is the status of government debt?
Government debt is currently 95.1% of GDP, which is 0.7 percentage points higher than the projections made in the OBR spring forecast.
How could political changes affect the economy?
Analysts warn that political uncertainty during a leadership change could prompt bond markets to price in larger deficits. This could cause gilt yields to rise, which would feed into higher mortgage rates and increased debt interest costs.
How do you think these fiscal pressures will influence the upcoming leadership transition within the Labour party?