UK Treasury “alarm rings”: Unexpected deficit in July, autumn budget faces market test

According to the report from Zhihu Finance APP, the UK’s fiscal budget unexpectedly recorded a deficit in July, highlighting the fragility of its public finances just as Chancellor John Healey is drafting his key Autumn Budget. Data released on Friday by the Office for National Statistics (ONS) showed that in July, government spending exceeded income by £1.8 billion (approximately $2.5 billion), an increase of £700 million compared to the deficit for the same period last year. Economists and the Office for Budget Responsibility (OBR) had previously forecast a balanced budget for the month, as July is typically boosted by scheduled self-assessment tax payments. After markets opened on Friday, UK government bond prices held broadly steady.

This data indicates that, on the eve of the Autumn Budget announcement on October 28, public finances are already in a precarious position. At that time, the new Prime Minister Andy Burnham’s national economic blueprint will begin to take shape.

The Office for National Statistics noted that total borrowing so far this fiscal year has reached £56.7 billion, £2.3 billion higher than anticipated by the budget watchdog. Although borrowing data for the first three months of this fiscal year has been revised downward, July’s poor performance put public finances off track once again.

Although Burnham has pledged to uphold fiscal prudence to reassure markets, investors are still waiting for details of his policy agenda—he has previously put forward several potentially costly policy goals, including a comprehensive reform of the social care system and the restart of government-backed affordable housing projects.

Martin Beck, Chief Economist at the think-tank WPI Strategy, said Friday’s data serves as “a reminder that fiscal arithmetic remains extremely tight” and “the government continues to face the classic dilemma of balancing policy ambitions, maintaining market confidence, and putting public finances on a sustainable path.”

Burnham and his Chancellor face a tough macroeconomic backdrop heading into autumn: UK government bond yields are hovering near multi-decade highs, and the British economy remains vulnerable to shocks from energy market volatility triggered by the Iran war.

Healey’s already limited fiscal cushion may now have narrowed further as a result of the economic shocks from the conflict. The market widely speculates that he will announce a new round of tax increases in the autumn.

After Friday’s data release, Healey stated that “budgetary discipline is the cornerstone of our UK economic stability,” and reaffirmed his commitment to fiscal rules—namely, to achieve a basic balance of day-to-day spending and income in the medium term. Data show that the current fiscal year to date has seen a recurrent budget deficit of £37.5 billion.

July is usually a strong month for tax revenue, as individuals and businesses pay their second self-assessment income tax payment for the previous fiscal year. Self-assessment income tax receipts for the month hit £17.1 billion, marking the highest level for any July on record, pushing total government revenue to £104.3 billion—up nearly £5 billion year-on-year.

However, this record tax income was offset by expenditure pressures during the month—inflation drove up costs in areas including welfare, debt interest, wages, and government procurement. Total expenditure in July, including net investment, reached £110.7 billion, up from £105 billion in the same period last year.

In the first four months of the fiscal year, government revenues were £2.8 billion above OBR forecasts, but expenditures were £5.1 billion higher than forecast. Public debt as a proportion of GDP in July stood at 94.1%, roughly around its highest level since the early 1960s.

Ashley Webb, Senior UK Economist at Capital Economics, stated: “With market rates likely having cut the Chancellor’s fiscal headroom from £24 billion in March to around £17 billion, we think there will be very limited scope for additional borrowing in the Budget later this year.”