The UK government budget came in below its annual borrowing target by £700m, official figures show – but the Iran war is likely to blow a hole in Rachel Reeves’s carefully calculated fiscal “headroom” over the coming months.
The government borrowed a net total of £132bn for the financial year ending in March, the Office for National Statistics (ONS) said. This slightly undershot the £132.7bn that the Office for Budget Responsibility (OBR) had forecast just last month.
The total was £19.8bn less than the £151.9bn borrowed in the previous financial year, after rounding, although it was still the sixth highest on record.
The figure was the lowest in three years and the best result since Labour came into power in July 2024. The last time it was lower was in the year to March 2023, when the government borrowed £127.3bn.
“The headline numbers coming in lower than the OBR’s expectations for the year as a whole will be a welcome boost to the chancellor,” Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, said.
For the month of March, public sector net borrowing – the difference between spending and income – was £12.6bn, which was £1.4bn lower than a year earlier and the lowest since March 2022. City economists had expected the March figure to be £10.3bn.
The annual figure was better than economists had expected after upward revisions for the previous two months. January’s record-breaking surplus was revised up to £32.2bn, while government borrowing in February was revised down from £14.3bn to £12.8bn.
James Murray, the chief secretary to the Treasury, said: “Our deficit is down £19.8bn because of our plan to cut borrowing. 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.”
Reeves announced £26bn in tax rises in her budget in November to lower debt and offset rising government spending on public services and upgrades to the UK’s infrastructure.
She has implemented a fiscal rule that requires the government to fund day-to-day spending with taxes by the end of the parliament. The government’s day-to-day spending rose by £65.6bn, or 6.4%, in the year to March..
The ONS said that tax receipts for central government rose by £54.7bn to £845.4bn. This includes increases of £34.6bn in income tax, £8.8bn in VAT and £5.4bn in corporation tax receipts. Changes to the rate of national insurance contributions, which came into effect in April last year, also bought in an extra £33bn to reach £206.8bn.
However, in a sign people are perhaps using their cars less to cut down on petrol and diesel usage amid rising costs, the amount collected in fuel duty in March was the lowest for any month since July 2023.
Reeves has made reducing government borrowing a priority, with the national debt hitting 93.8% of gross domestic product in March, a level not seen since the early 1960s.
The cost of servicing that debt is high. The ONS said the interest payable on government debt increased by £12.2bn to £97.6bn for the financial year, although it was down in March to £3.2bn compared with £4.5bn in the same month last year.
In February the chancellor announced that her buffer – or headroom – to meet this rule by 2030 had increased in its latest projections to £23.6bn, from £21.7bn at the time of the November budget.
However, the conflict in the Middle East is expected to jeopardise this headroom, with rising inflation and potential job cuts as well as higher interest rates eating into this target.
Ruth Gregory, the deputy chief UK economist at Capital Economics, said: “We do not expect this improvement to last long. We think the energy price shock will mean that borrowing overshoots the OBR’s forecast by a huge £29bn for the 2026-27 fiscal year and by about £13bn in subsequent years.”
The Resolution Foundation has forecast that a worsening Middle East conflict could deal a £16bn hit to the UK’s public finances by 2030, wiping out almost three-quarters of Reeves’s headroom.
