The UK's fiscal outlook has worsened following Chancellor John Healey's Budget, driven by the global energy supply shock and higher borrowing costs. The war in the Middle East and rising energy prices have increased debt-servicing costs and social security spending, partially offset by higher income tax revenues from nominal GDP growth. Healey's measures were small in scale, featuring a minor giveaway this year and next to cushion energy price impacts, followed by gradual small tax rises. The net effect keeps the UK on a fiscal consolidation path, albeit slightly slower than planned.
The Office for Budget Responsibility now expects the average cost of UK government borrowing to rise to 6% by 2031-32, up from a peak of 5.4% in March estimates. Net interest costs are estimated £10bn higher annually, roughly 0.3% of GDP. Together with higher welfare costs, these factors increase expected borrowing by £65bn over five years, about 0.4% of GDP annually.
Despite additional gilt issuance, markets remain unruffled. The Bank of England is expected to take the Budget in its stride as it prepares for an interest rate increase next week. The measures will have limited implications for monetary policy, with only marginal pressure for higher short-term rates.
The Debt Management Office confirmed slightly higher gross financing needs each year, with a notable jump in 2030-31 due to increased gilt redemptions reflecting shorter debt maturity structures. Total issuance for 2026-27 rises modestly to £250.6bn from £246.2bn in April.
Source: Financial Times Markets · Summarized by HeadlinesBriefing