Chancellor Rachel Reeves has been given an unexpected dose of good news after government borrowing fell £20 billion in the latest financial year, but fears are mounting over a hit to the public finances from the Iran war.
The Office for National Statistics (ONS) estimated public sector borrowing dropped £19.8 billion, or 13.1%, to a lower-than-expected £132 billion in the 12 months to the end of March, helped by rising tax receipts from last April’s labour tax hike.
The outturn was £700 million below the £132.7 billion forecast by the UK’s fiscal watchdog, the Office for Budget Responsibility (OBR), and the lowest since 2022-23.
But it comes amid mounting concerns the Middle East conflict will send government borrowing surging in the current financial year and decimate the Chancellor’s financial headroom.
Borrowing in the financial year was estimated at 4.3% of gross domestic product (GDP) – the lowest level since 2019-20, before the Covid pandemic struck.
It follows a £1.4 billion year-on-year drop to £12.6 billion in March, which was the lowest borrowing for the month since 2022, but higher than expected by most economists.
Tom Davies, ONS senior statistician, said: “Borrowing was almost £20 billion lower than in the previous financial year, and broadly in line with the OBR’s forecast.
“As a proportion of gross domestic product, it fell to its lowest level since 2019-20, just prior to the pandemic.
“Although spending has risen this financial year, this was more than offset by increased receipts.
“The figures also show borrowing for last month on its own was 10% less than in March last year.”
The annual figure was better than expected by economists after revisions to the previous two months, which saw the borrowing estimated reduced by £6.4 billion for the first 11 months.
Last April’s hike in employer national insurance contributions (NICs) saw receipts from the tax jump 19% to £206.8 billion – the highest since 2022-23.
Debt interest costs fell in March, but rose over the full year to £97.6 billion, which was the second highest annual level on record.
James Murray, Chief Secretary to the Treasury, said: “In a volatile world the decisions we are taking are the right ones to keep costs down, take back our energy security and cut borrowing and debt.”
Earlier this week the Resolution Foundation warned over a potential £16 billion surge in government borrowing by 2029-30 due to the Middle East conflict.
It warned the Chancellor’s £23.6 billion headroom on her fiscal rules was at risk of being cut by nearly three quarters if the Iran war is prolonged, taking its toll on the economy and leading to rising inflation and possible job cuts.
Elliott Jordan-Doak, at Pantheon Macroeconomics, said the current year would prove more “daunting” for Ms Reeves because of the Iran war.
He said: “We estimate that the Government will still need to shell out around £12 billion more in interest repayments in 2026-27 than expected at the time of the spring statement.
“Any further fiscal support for households or businesses will require additional borrowing on top of the amounts we forecast for extra interest repayments, though we expect only small fiscal support given that energy prices have risen far less than in 2022.”
