UK government borrowing fell more sharply than expected in June, providing an early piece of positive economic news for Prime Minister Andy Burnham and his newly appointed chancellor, John Healey.

Public sector net borrowing, which measures the difference between government spending and income, was £16 billion during the month. This was £7.9 billion lower than in June 2025 and £300 million below the forecast prepared by the Office for Budget Responsibility. It was also considerably lower than the £18 billion expected by economists surveyed before the figures were released.

The improvement was supported by stronger tax receipts and a substantial reduction in the cost of servicing inflation-linked government debt. However, the wider public-finance position remains difficult. Borrowing during the first three months of the financial year was still £2.7 billion above the OBR forecast, while public debt remains close to the annual value of the entire UK economy.

The figures therefore offer some immediate relief to the new government, but they do not create enough financial room to support a large programme of unfunded spending or tax reductions.

Borrowing falls by a third

The £16 billion borrowed in June was approximately one-third lower than the £23.9 billion recorded during the same month last year.

Central government borrowing accounted for £16.4 billion of the total, while local government recorded an estimated surplus of £1 billion. Public corporations and the Bank of England contributed the remaining difference.

The result was also a substantial improvement on May, when borrowing reached £23.3 billion after higher inflation increased the cost of index-linked government debt. June’s decline partially reverses that deterioration and suggests that the public finances may be less weak than the previous month’s figures implied.

However, monthly borrowing figures can be volatile and are frequently revised. The ONS has cautioned that the latest estimates for public corporations, local government and the Bank of England remain provisional. A single month should therefore not be treated as evidence that the long-term fiscal position has fundamentally improved.

Stronger tax receipts support the improvement

Central government received £91.6 billion from taxes and other current income during June, an increase of £6.2 billion, or 7.2%, compared with a year earlier.

Income-tax-related receipts increased by £1.8 billion to £24.4 billion, while VAT receipts rose by £1.1 billion to £18 billion. Corporation tax contributed £9.5 billion, an increase of £1.3 billion, and National Insurance contributions rose by £600 million to £17.1 billion.

The increase in corporation tax receipts was particularly strong at 16.3%. Income-related taxes rose by 7.9%, while total central government tax receipts increased by 8.3% to £68 billion.

Higher receipts can reflect several factors, including wage growth, company profitability, inflation and the effects of previously announced tax changes. They provide the government with greater income, but they can also indicate that businesses and households are carrying a heavier effective tax burden.

The figures suggest that the tax base remains relatively resilient despite weak business confidence, modest economic growth and disruption caused by the Middle East conflict. However, maintaining this performance will depend on employment, wages, consumer spending and corporate profits continuing to grow.

Lower debt interest was the largest contributor

The most important reason for the decline in borrowing was the reduction in government debt-interest costs.

Central government interest payable was £11.8 billion in June, £5.3 billion lower than a year earlier. Despite the substantial reduction, it was still the fourth-highest June figure recorded before adjusting for inflation.

Around £4.8 billion of the interest cost resulted from inflation adjustments applied to index-linked government bonds. The amount recorded each month can move sharply because payments on these gilts are linked to changes in the Retail Prices Index.

This volatility explains why borrowing can change significantly from one month to the next without a corresponding transformation in government policy or the underlying economy.

Lower inflation-linked interest helped June’s figures, but the government remains exposed to high market borrowing costs. Yields on ten-year and thirty-year gilts reached two-month highs on Tuesday as investors considered the new government’s spending ambitions and the possibility that fiscal policy could become less restrictive.

The cost of issuing new debt matters because higher yields gradually increase the interest paid by the government. They also influence the wider economy by feeding into mortgage pricing, corporate bonds and the rates charged on some business finance.

Spending pressures have not disappeared

The decline in total expenditure was largely caused by lower debt interest rather than a broad reduction in public spending.

Central government expenditure was £108 billion in June, only £500 million lower than a year earlier. Within this total, social-benefit payments increased by £2.2 billion to £28.7 billion, while spending on goods and services rose by £800 million to £38.8 billion. Net investment increased by £600 million to £6.6 billion.

Many benefits rise in line with inflation, while the State Pension is affected by earnings and the triple-lock mechanism. Public-sector pay, procurement costs and the expense of delivering services are also influenced by inflation.

These pressures are structural rather than temporary. An ageing population, rising healthcare demand, welfare expenditure and commitments to increase defence spending will continue to place pressure on the public finances.

The appointment of John Healey as chancellor has also drawn attention to defence spending. Healey previously served as defence secretary and resigned from the Starmer government after arguing that planned increases were insufficient. Defence shares initially rose following his appointment as investors anticipated the possibility of higher military expenditure.

Year-to-date borrowing remains above forecast

Although the June result was better than expected, the cumulative position remains less encouraging.

The government borrowed £57.6 billion between April and June. This was £3.7 billion lower than during the same period last year but £2.7 billion above the OBR’s forecast of £54.9 billion.

The current budget deficit, which excludes borrowing used for capital investment, reached £42 billion during the first three months of the financial year. This was £5 billion lower than a year earlier but £1.3 billion above the official forecast.

The distinction between current and investment spending is important because the government’s fiscal rules require day-to-day expenditure eventually to be covered by revenues. Borrowing for productive capital investment is treated differently, although it still increases debt and incurs interest.

The new government has indicated that it wants to use public investment to support housing, infrastructure, regional development and reindustrialisation. The borrowing figures demonstrate why those plans will require careful prioritisation and credible funding.

Government debt remains historically high

Public sector net debt was provisionally estimated at almost £2.99 trillion at the end of June, an increase of £122.3 billion compared with a year earlier.

Debt was equivalent to 94.9% of gross domestic product, 0.4 percentage points higher than in June 2025 and at levels last seen during the early 1960s.

The comparison with the 1960s requires caution because the structure of the economy, maturity of government debt and nature of public assets have changed considerably. Nevertheless, the figure demonstrates the scale of Britain’s accumulated obligations.

High debt does not mean the government is about to run out of money. The UK issues debt in its own currency and continues to have access to deep financial markets. The more immediate risk is that a greater proportion of tax revenue must be used to pay interest rather than fund public services, tax reductions or investment.

It also leaves the government more vulnerable to changes in inflation and investor confidence. When gilt yields rise, the cost of refinancing maturing debt and financing new borrowing increases.

Early test for Burnham and Healey

The figures were published shortly after Andy Burnham entered Downing Street and appointed John Healey as chancellor.

Healey has said that fiscal control will be his first duty and that the government intends to meet its fiscal rules with a buffer against economic uncertainty. Burnham has also recommitted to the existing framework, although he has suggested that there may be flexibility within the rules to support investment.

The government has already announced that it will remove VAT from domestic electricity bills from 1 October, with the initial cost funded by cancelling the previous digital identity programme. The measure is intended to provide cost-of-living support and reduce the effect of high energy prices on households.

The June borrowing result makes the announcement easier to present politically, but it does not provide a permanent source of funding. The government will still need to decide how it will finance its wider ambitions for housing, public services, industry and defence.

Any perception that spending commitments are being introduced without reliable funding could push gilt yields higher. That would increase government interest costs and could offset some of the benefit gained from stronger tax revenues.

Markets remain cautious

Financial markets offered a more cautious assessment than the headline borrowing figure might suggest.

Sterling fell against both the dollar and the euro on Tuesday, while ten-year gilt yields rose to just above 5.05%, their highest level since May. Thirty-year yields also reached a two-month high as investors assessed the likelihood of additional borrowing under the Burnham government.

The appointment of Healey was generally regarded as a stabilising decision because of his previous Treasury experience and reputation for fiscal caution. However, investors continue to question how the government can increase investment, support households, raise defence expenditure and control welfare costs without higher taxation or borrowing.

This matters to businesses because the government bond market provides a benchmark for many other borrowing costs.

Higher gilt yields can contribute to more expensive fixed-rate mortgages, corporate debt and long-term business finance. They can also reduce the value of existing bonds held by pension schemes and investment funds.

What the figures mean for UK businesses

The stronger tax receipts and lower monthly borrowing reduce the immediate risk of an emergency fiscal response. However, they do not remove the possibility of future tax changes.

Businesses should continue to expect pressure on the government to increase revenue, limit spending or find new forms of private finance. The precise balance will depend on economic growth and whether borrowing returns to the OBR’s forecast path.

Companies dependent on public contracts may face tighter scrutiny of expenditure and stronger demands to demonstrate value for money. At the same time, the government’s emphasis on infrastructure, defence, housing and industrial policy could create opportunities for construction, engineering, manufacturing and professional-services businesses.

The level of gilt yields will also be important. Companies planning investment or refinancing should not assume that official interest rates are the only influence on their borrowing costs. Long-term finance can become more expensive when investors demand higher returns from government debt.

The public-finance position also strengthens the case for policies that improve productivity and private investment. Sustained economic growth would increase tax receipts without requiring every improvement to come from higher tax rates.

A welcome result, but not a turning point

June’s borrowing figures are undoubtedly better than expected.

Tax receipts grew strongly, spending declined slightly and debt-interest costs were substantially lower than a year earlier. The £16 billion deficit provides John Healey with a more favourable first set of public-finance data than the previous month appeared likely to deliver.

However, the improvement should not be overstated.

Borrowing remains above forecast for the financial year to date, the current budget is still in deficit and public debt is close to 95% of GDP. Benefits, public services, defence and investment all create continuing demands on government resources.

The central challenge facing the new administration is therefore unchanged. It must improve economic growth and public services while maintaining the confidence of the investors who finance government borrowing.

June’s figures provide some breathing space, but not enough to avoid difficult decisions.

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