Key Takeaways

• May’s budget deficit hit £23.3 billion, up 30% year-on-year and well above the £18.5 billion forecast.
• Debt interest costs jumped 54% in May, with further increases expected next month.
• Two-month borrowing for the fiscal year is running 24% above 2025 levels, exceeding OBR forecasts.
• UK 15-year bond yields recently hit their highest since at least 1998.
• Tax revenue is up 4.1%, but benefits spending has risen 7.4%, widening the fiscal gap.

British government borrowing jumped much more sharply than expected in May as higher inflation pushed up the cost of servicing inflation-linked debt, official figures showed Friday, in unwelcome news for the public finances.

Britain ran a budget deficit of £23.3 billion ($30.7 billion) in May, up 30% on a year earlier and above all economists’ expectations in a Reuters poll, which had pointed to a little-changed reading of £18.5 billion.

Inflation-linked debt drives up costs

Britain has historically issued far more index-linked debt than other countries. Interest payments and repayment amounts on this debt are tied, with a three-month lag, to retail price inflation, which stood at 3.1% in May and was higher earlier in the year.

In March, before the impact of the U.S.-Iran war was clear, the government’s budget watchdog forecast a £115.5 billion deficit for the 2026/27 financial year — equivalent to 3.6% of national income, down from 4.3% in 2025/26.

But Friday’s data showed public sector net borrowing for the first two months of the financial year was 24% higher than in 2025, at £46.3 billion, compared with an OBR forecast of £38.6 billion.

“Several questions remain over whether the current plans will be sufficient to reduce public borrowing,” said Matt Swannell, chief economic adviser at forecasters the ITEM Club.

Debt interest costs in May alone were 54% higher than a year earlier, and the ONS said they were likely to rise further in next month’s data.

Bond yields climb as fiscal pressure mounts

Last week Britain offered investors the highest yield since at least 1998 when it sold £9 billion of 15-year debt.

The government is also struggling to finance extra defense spending within existing budget rules and previous spending promises to other departments, prompting Defence Secretary John Healey to resign in protest last week.

Tax and other government revenues are up 4.1% so far this year, while the cost of benefits including pensions is 7.4% higher and spending on public services has risen 2.9%.