Annual UK government borrowing has fallen to its lowest level in three years, but economists warn the reprieve may be short-lived due to the economic fallout from the Iran war.
Borrowing—the gap between government spending and tax revenue—dropped by £19.8 billion to £132 billion in the year to March, according to the Office for National Statistics (ONS). That figure is slightly below the £132.7 billion forecast by the Office for Budget Responsibility (OBR), the government's independent fiscal watchdog.
However, analysts caution that borrowing could rise again if inflation picks up and if the government steps in to help households with soaring energy bills. Ruth Gregory, deputy chief UK economist at Capital Economics, noted that the full impact of the energy price shock from the Iran conflict "is still to come."
Since the outbreak of the US-Israeli war with Iran, energy prices have surged after the effective closure of the Strait of Hormuz, a vital waterway that normally carries about 20% of the world's oil and liquid natural gas. This has already pushed up petrol and diesel costs and begun to accelerate inflation.
Last week, the International Monetary Fund (IMF) warned that the UK would be the hardest hit among advanced economies from the Iran war's energy shock, slashing its UK growth forecast for this year to 0.8% from 1.3%.
While the government may see a short-term boost from higher tax revenues on petrol and North Sea oil and gas, weaker growth is expected to slow overall tax receipts. Additionally, borrowing costs have risen since the start of the war, and Chancellor Rachel Reeves has hinted at targeted support for lower-income households struggling with energy bills.
Capital Economics' Gregory estimates that a combination of £20 billion in targeted energy price support, elevated interest rates, and a weakening economy could push borrowing from £132 billion in 2025/26 to around £145 billion this year.
Elliott Jordan-Doak of Pantheon Economics described the outlook as "more daunting," noting that the government faces an extra £12 billion in interest payments this year, and any further fiscal support would require additional borrowing.
March borrowing alone was £12.6 billion, higher than analysts expected but £1.4 billion less than a year earlier—the lowest March figure since 2022.
For the full fiscal year, borrowing as a share of GDP stood at 4.3%, the lowest since 2019-20, just before the COVID-19 pandemic. ONS senior statistician Tom Davis said that although spending rose, it was more than offset by higher receipts.
Nabil Taleb of PwC UK warned that the UK's economic outlook is "set to become more challenging," with speculation growing about how weaker growth will affect the chancellor's fiscal headroom. In last month's Spring Statement, the OBR projected Reeves had a £23.6 billion buffer against her rule not to borrow for day-to-day spending within five years.
Earlier this week, the Resolution Foundation think tank estimated that a severe but plausible intensification of the conflict could add £16 billion a year to borrowing by 2029-30.
Chief Secretary to the Treasury James Murray defended the government's record, saying: "Our deficit is down £19.8 billion 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."
Shadow chancellor Mel Stride countered that the annual deficit was "70% higher than was forecast when they [Labour] came to office," adding: "Labour have left Britain dangerously exposed to economic shocks."
Reform UK's Treasury spokesperson Robert Jenrick urged the government to "cut the waste and spend money on bringing down people's bills instead."