Annual UK Borrowing Falls by £20bn but Iran War Clouds Outlook

Government borrowing in the UK dropped last year, but experts suggest the positive trend might not endure due to the ongoing effects of the Iran conflict. According to the Office for National Statistics (ONS), borrowing—the disparity between spending and tax revenue—decreased by £19.8bn to £132bn for the year ending March. This total slightly underperformed the £132.7bn forecast by the Office for Budget Responsibility.

Analysts Warn of Future Financial Strain

Ruth Gregory, deputy chief UK economist at Capital Economics, warned that the full consequences of the energy price shock from the Iran war “are yet to materialize.” She stated that the interplay of targeted energy subsidies, high interest rates, and a weakening economy would push borrowing from £132bn in 2025/26 to around £145bn this year. Elliott Jordan-Doak, senior UK economist at Pantheon Economics, added that the chancellor is confronting “a more challenging 2026/27 ahead,” with interest payments set to rise by approximately £12bn.

“We continue to think that the combination of some targeted energy price support, totalling about £20bn, high interest rates and the weakening economy will mean borrowing rises from £132bn in 2025/26 to about £145bn this year.”

“Any further fiscal support for households or businesses will require additional borrowing.”

IMF Highlights UK’s Vulnerability to Energy Crisis

Last week, the International Monetary Fund (IMF) noted that the energy shock linked to the Iran war would most severely impact the UK among advanced economies. For March alone, the ONS recorded borrowing at £12.6bn, exceeding analyst predictions. Despite this, the figure was £1.4bn lower than the same period the previous year, marking the lowest March borrowing since 2022.

Deficit Reduction and Economic Context

In the year to March, borrowing as a share of GDP stood at 4.3%—the lowest level since 2019-20, before the pandemic. “Although spending has increased this financial year, this was more than offset by higher receipts,” explained Tom Davis, a senior statistician at the ONS. James Murray, Chief Secretary to the Treasury, stated: “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.”

Criticism from Opposition

Mel Stride, the shadow chancellor, argued that the annual deficit is “70% higher than was forecast when they [Labour] came to office.” He contended that Labour has left Britain “dangerously exposed to economic shocks.”