UK borrows less than expected in June but public finances remain a challenge

The government borrowed slightly less than expected in June, according to figures published as new Prime Minister Andy Burnham began setting out measures to cut living costs for households.

Borrowing - the difference between spending and income from taxes - was £16bn, about £7.9bn lower than a year earlier, although analysts said challenges remained over the UK's public finances.

Other data showed the unemployment rate was unchanged, with the Office for National Statistics (ONS) saying the labour market was "relatively steady".

However, while the borrowing figure was less than forecast, the ONS said total debt was high by historical standards and close to the annual value of the UK economy.

Borrowing for June was slightly below the £16.3bn that had been predicted by the government's official forecaster, the Office for Budget Responsibility (OBR).

Ruth Gregory, deputy chief UK economist at Capital Economics, said June's figure was "a rare piece of good news" for the new prime minister and his new Chancellor, John Healey.

However, she added: "Overall, there's no escaping the fact that the public finances are fragile and that there is limited scope for extra borrowing."

So far in the current financial year, borrowing has reached a total of £57.6bn, according to the Office for National Statistics (ONS). While this is down £3.7bn from the same period last year, it is £2.7bn above the OBR's forecast.

James Smith, chief UK economist at ING, told the BBC's Today programme the fact that borrowing was still running ahead of the OBR's projections was "a reminder of the challenges that the new chancellor and the new prime minister face".

He added they would face a "difficult picture" at the autumn Budget, with "lots of tough choices to be made".

Burnham and Healey have both pledged to stick to former chancellor Rachel Reeves' fiscal rules on spending and borrowing. although the new prime minister said on Monday he would use "any flexibility within them" to help with policy changes.

Shortly after Burnham's comments were made public, the yield on 10-year government bonds - effectively the interest rate charged to the UK government for a 10-year loan - rose above 5%.

The yield hit 5.03% late on Monday afternoon. However, when trading began on Tuesday the rate slipped back slightly to 5.01%.

In a statement released on Monday, Healey said "fiscal credibility is the bedrock for economic stability and for national security".

The new leadership's first major policy announcement was to cut VAT on household electricity bills from 5% to zero from the beginning of October.

Ministers said it would be funded by savings from the cancellation of the digital ID programme, but Labour's Darren Jones, who was sacked as chief secretary to the prime minister on Monday, accused the government of announcing an unfunded tax cut.

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June's borrowing figure was helped by higher revenues from income tax and VAT, while interest payments on inflation-linked debt fell.

The government paid £11.8bn in debt interest payments in June, which was nearly a third lower than the same point last year.

However, it was still the fourth highest total for June on record, the ONS said.

Public sector net debt currently stands at nearly £3 trillion, which is almost as much as the value of all the goods and services produced in the UK in a year, known as the gross domestic product, or GDP.

However, in the October 2024 Budget, Reeves changed the definition of debt that the government would use in its fiscal rules to a broader measure called public sector net financial liabilities (PSNFL).

Under this measure, total debt was £2.7tn at the end of June 2026, the equivalent of 84.5% of GDP.

Meanwhile, the latest survey of the labour market showed the unemployment rate remained unchanged at 4.9%.

Growth in regular earnings - which excludes bonuses - remained unchanged, rising at an annual pace of 3.4% in the March to May period.

However, the ONS noted that regular wage growth in the private sector fell below 3% for the first time since 2020.

Yael Selfin, chief economist at KPMG, said the "subdued" wage growth made it more likely that the Bank of England would keep interest rates on hold at 3.75% when it meets next week.

"Weak hiring activity is continuing to weigh on workers' bargaining power, limiting upward pressure on wages," she added.