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Record borrowing amid economic strain
The UK's public sector borrowing reached £24.3 billion in April, marking the highest figure for the month since the Covid-19 pandemic in 2020, according to official data released on Friday. The increase of £4.9 billion from the same period last year exceeded expectations, underscoring the fiscal pressures facing the government.
Drivers behind the surge
Office for National Statistics (ONS) chief economist Grant Fitzner attributed the rise to higher spending on benefits and other costs, which outweighed increased tax receipts. Net social benefits climbed by £2.7 billion, largely due to inflation-linked adjustments to benefits and the state pension.
Debt interest payments also hit a record for April, reaching £10.3 billion, up £0.9 billion from a year earlier. Analysts linked the spike to rising energy prices following the onset of the Iran war, which has dampened economic growth forecasts and delayed anticipated interest rate cuts by the Bank of England.
Economic outlook darkens
Ruth Gregory, deputy chief UK economist at Capital Economics, warned that the figures "highlight the deteriorating growth outlook and fragile fiscal backdrop" facing the next government. Retail sales data reinforced concerns, with volumes falling 1.3% in April-the sharpest decline in nearly a year-driven by a 10.2% drop in motor fuel sales as consumers cut back on petrol amid rising prices.
Clothing stores also reported weaker sales, partly blamed on unpredictable weather. The ONS noted that motorists appeared to be conserving fuel after stocking up in March.
Borrowing costs and political uncertainty
Yields on government bonds, or gilts, have risen since the Iran conflict began, reflecting market expectations that the Bank of England may need to raise interest rates to curb inflation. Rob Wood, chief UK economist at Pantheon Macroeconomics, estimated that debt interest costs in 2026/27 could be £15 billion higher than projected in the Budget if gilt yields remain at current levels.
Wood added that "political risk"-including uncertainty around Labour's leadership-had further elevated the UK's borrowing costs, which he expects to stay "more elevated than they otherwise would be this year."
Government response and measures
The government announced measures on Thursday to mitigate the cost-of-living crisis, including a VAT cut on family outing tickets, free bus travel for under-16s in England during August, and reduced import taxes on essential foods. Funding for these initiatives will come from changes to tax rules for UK-based oil and gas companies.
Chief Secretary to the Treasury Lucy Rigby defended the government's approach, stating it had "cut borrowing and debt" and reduced government borrowing by over £20 billion last year. She emphasized the importance of fiscal rules to protect households amid the economic fallout from the Iran war, which the UK "played no part in."
Opposition reactions
Shadow chancellor Mel Stride pointed to the record debt interest spending in April, arguing that the spike in borrowing costs reflected market concerns about Labour leader Keir Starmer's potential premiership. Reform UK deputy leader Richard Tice criticized the government's spending, calling it "out of control" and blaming welfare and "wasteful overspending."
Long-term fiscal challenges
Dennis Tatarkov, senior economist at KPMG UK, warned that lower growth forecasts could keep public sector borrowing elevated, potentially forcing the chancellor to adjust fiscal policy in the autumn Budget. The Office for Budget Responsibility (OBR) had previously estimated a £23.6 billion headroom for Chancellor Rachel Reeves against her fiscal rule, but this forecast predated the Iran war.
"Public sector borrowing is likely to remain elevated in the medium term, potentially forcing the chancellor's hand to make more tweaks to fiscal policy."
Dennis Tatarkov, KPMG UK
