UK posts unexpected budget deficit in July as spending rises

By Andy Bruce

MANCHESTER, England, Aug 21 (Reuters) - Britain's government recorded an unexpected budget deficit last month, a reminder of the financial constraints facing new finance minister John Healey ahead of his October budget in spite of recent better news on the economy.

The Office for National Statistics (ONS) said public sector net borrowing was £1.8 billion ($2.5 billion) in July, as higher government spending caused by inflation counteracted record self-assessed income tax receipts for the month.

A Reuters poll of economists had pointed to a balanced budget, while the Office for Budget Responsibility's (OBR) projections had pencilled in a £500 million surplus — which would have been the first for any July since before the COVID-19 pandemic.

But the ONS said central government expenditure on social benefits was up £2 billion in July compared with a year ago, while spending on goods and services — which includes staff costs — was up £1.2 billion.

The deficit for June was revised down sharply to £12.8 billion from £16.0 billion. Still, borrowing for the first four months of the 2026/27 financial year remains higher than the OBR's forecast, at £56.7 billion versus £54.4 billion.

"We expect government borrowing to exceed the OBR forecast over the rest of the year as spending continues to rise," said Thomas Pugh, chief economist at tax and consulting firm RSM.

"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."

The current budget deficit, which measures day-to-day spending against tax revenues and must be balanced in 2029/30 according to the current fiscal rules, stood at £34.7 billion over the April-July period, against the OBR's projection of £36.7 billion.

"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," Healey said in a statement.

Future revisions to the data could help Healey. The ONS has revised down its estimates for public sector net borrowing compared with the initial reading in every month this calendar year.

Borrowing in May and June has been revised down by £7.5 billion combined.

The debt interest bill was £700 million higher than a year ago. An ONS statistician said he expected this to rise sharply when data are released for September, reflecting inflation trends and the timing of interest payments on bonds.

($1 = 0.7324 pounds)

(Reporting by Andy Bruce; Editing by William James and Emelia Sithole-Matarise)