UK June borrowing undershoots forecast as Burnham unveils VAT cut
Lower-than-expected UK public borrowing in June provides limited relief for the new Burnham government as it balances market jitters over fiscal discipline with a new VAT cut on electricity.
The UK government borrowed £16bn in June, coming in £300m below the Office for Budget Responsibility’s forecast and offering a modest reprieve for the newly installed administration. The figure was £7.9bn lower than a year earlier, driven primarily by a sharp drop in inflation-linked debt interest.
This data arrives at a highly sensitive moment for sovereign debt markets. Investors have already pushed up UK government borrowing costs amid global bond market volatility and specific anxiety over the new prime minister’s tax and spending plans. Andy Burnham has publicly hinted at using "flexibility" within the existing fiscal rules to boost public investment, a stance that markets have interpreted as a potential signal for higher borrowing.
Testing that market sensitivity, Burnham announced a new policy to scrap VAT on household electricity bills from October 1. The move is designed to help households manage elevated energy costs tied to the Iran war. Chancellor John Healey stated this year's tax cut would be directly funded by cancelling the digital ID programme.
Healey moved quickly to reassure investors by pledging strict adherence to the self-imposed borrowing and debt constraints originally drawn up by Rachel Reeves. "Fiscal control is the first duty of any chancellor. It is mine. And fiscal credibility is the bedrock for economic stability and for national security," he said. He added that he and Burnham had agreed to "work in lockstep to meet the fiscal rules with a buffer against uncertainty."
Despite the positive June surprise, the underlying fiscal trajectory remains tight. Debt interest payments still totalled £11.8bn for the month, marking the fourth highest June on record. Furthermore, cumulative borrowing for the financial year-to-date stands at £57.6bn, which is £2.7bn above the OBR's projections even though it represents a £3.7bn decrease from the prior year.
Economists warned that the administration has virtually no margin for error as it navigates looming spending pressures. "June’s public finances were a rare piece of good news for the new PM Burnham and chancellor Healey, but with the UK’s debt burden still rising, there is limited scope for extra public borrowing," said Ruth Gregory, deputy chief UK economist at Capital Economics. Nabil Taleb, an economist at PwC UK, noted that with fiscal headroom constrained, "even modest commitments can carry significant consequences," stressing that ambition must be matched by a convincing grip on borrowing.
