UK posts £1.8 billion budget deficit in July as rising spending outweighs tax receipts

Unexpected shortfall in July

The UK government registered an unexpected budget deficit of £1.8 billion ($2.5 billion) in July 2026, according to official figures from the Office for National Statistics (ONS). Economists polled by Reuters had predicted a balanced budget with zero net borrowing, while the Office for Budget Responsibility (OBR) had projected a £500 million surplus. The recorded deficit was £700 million, or 68.7%, higher than the borrowing total recorded in July 2025. Although borrowing was £16 billion lower than in June, the deficit ended expectations for the first July budget surplus since before the COVID-19 pandemic.

Spending growth outpaces record revenue

Higher expenditure caused by inflation counteracted record self-assessed income tax collections for the month. Income tax receipts reached £17.1 billion in July, an increase of £1.7 billion compared with the previous year due to the late July self-assessment filing deadline. However, central government expenditure on social benefits, including state pensions and welfare payments, rose by £2 billion year-on-year. Government spending on goods and services, which includes staff costs, rose by £1.2 billion. In addition, monthly debt interest payments increased by £700 million from a year earlier to £7.7 billion.

Four-month borrowing and balance sheet revisions

Total public sector net borrowing for the first four months of the 2026/27 financial year stood at £56.7 billion, exceeding the OBR forecast of £54.4 billion by £2.3 billion. Despite overshooting official projections, the four-month borrowing total remained £6 billion (9.6%) lower than the same period in 2025. This was aided by downward revisions to earlier months, including a £2.7 billion reduction for the previous quarter and a combined £7.5 billion downward revision to May and June figures. The current budget deficit, which measures day-to-day spending against tax receipts, was £34.7 billion over the April–July period, below the OBR projection of £36.7 billion.

Fiscal framework and Budget preparations

The figures arrive as Chancellor of the Exchequer John Healey prepares his first Budget, scheduled for late October (with dates cited between 27 and 28 October). Healey has adopted the fiscal rules of his predecessor Rachel Reeves, which mandate funding all day-to-day spending with tax revenues by the 2029/30 fiscal year. Healey defended the administration's fiscal position following the release.

Fiscal discipline is the bedrock of our UK economic stability and national security, which is why we are committed to meeting our fiscal rules, with a buffer against global uncertainties.

Prime Minister Andy Burnham recently established a Manchester-based satellite office of Downing Street to oversee economic growth policy, leaving the Treasury focused on public finances.

National debt threshold and economic reaction

Total UK national debt reached £2.985 trillion in July, representing 94.1% of gross domestic product after increasing by £127.2 billion over the previous twelve months. Economists warned that sticky inflation and rising bond yields will narrow the government's fiscal headroom ahead of the autumn fiscal event. Thomas Pugh, chief economist at RSM, outlined the borrowing trajectory.

Higher gilt yields, stubborn inflation, and a government determined to spend more means borrowing is on course to remain above 4% of GDP this year, instead of falling to 3.6% as projected.

Ashley Webb, senior economist at Capital Economics, stated that the borrowing gap will likely widen further as economic growth slows and additional household cost-of-living support is introduced.