Britain’s public finances deteriorated sharply in August, with net borrowing reaching £18.3 billion — a full £3.5 billion above the Office for Budget Responsibility’s (OBR) forecast and exceeding every estimate in a Reuters poll. The Office for National Statistics (ONS) also revised earlier months higher, pushing the April-to-August deficit to £77.3 billion, £8.1 billion above the official trajectory.
Borrowing Overshoot Erodes Budget Headroom
The overshoot leaves Chancellor John Healey with a significantly smaller cushion ahead of his October 28 Budget. The cumulative deficit for the first five months of the fiscal year now stands at £77.3 billion, compared with the OBR’s £69.2 billion projection. The current deficit — day-to-day spending minus revenue — reached £51.9 billion through August, £4.8 billion worse than planned. Under the government’s fiscal rule, that measure must swing into surplus by 2029-30, a target that now looks more distant.
August’s borrowing was also £2.9 billion, or 19.0%, higher than in August 2025. The ONS revised the full 2025-26 borrowing total up by £4.5 billion to £134.3 billion, underscoring a weakening trend.
Gilt Market Faces Twin Pressures
The fiscal miss compounds challenges in the gilt market. The 10-year gilt yield stood at 5.354% at 10:52 BST, up modestly on the day and well above Goldman Sachs’ end-2026 forecast of 5.00%. Gilt futures initially fell 20 ticks before recovering. Investors are weighing heavier gilt supply against persistent inflation that keeps the Bank of England from cutting rates.
The Debt Management Office has already sold £124.8 billion of gilts in 2026-27, 50.7% of its £246.2 billion remit. The Bank of England’s Asset Purchase Facility still holds £488.2 billion in gilts, with active sales running near £20 billion annually. Last week the Bank paused auctions during a review of its unwind plan, offering some supply relief, but analysts say it does little to address the underlying fiscal gap.
Analysts Split on Duration Risk
Market strategists are divided. Goldman Sachs (NYSE: GS) now prefers euro-area duration and has raised its 10-year gilt yield forecast to 5.00%, citing energy inflation and bond supply. Craig Rippe of Keyridge Asset Management favours shorter duration, wary of inflation and future issuance. Anna Macdonald of Hargreaves Lansdown sees a selective hold-to-maturity case, advising investors to avoid trading every headline.
“Medium-term borrowing prospects look far more challenging than in March,” Matt Swannell, adviser to the EY ITEM Club, told Reuters. He estimates fiscal headroom at just over £10 billion, down from £24 billion.
Some Offsetting Factors
Not all data points to deterioration. Borrowing remains £2.2 billion below last year’s level, and the debt-to-GDP ratio fell to 93.8%, down 1.3 percentage points from a year earlier. Still, the recent monthly overshoots have wiped out much of that improvement.
Risks and the October Test
The primary risk is a renewed jump in energy prices, which would lift both inflation-linked spending and gilt yields, erasing what little headroom remains before the OBR finalises its forecasts. That could force sharper tax increases or spending cuts.
The next firm test comes on October 28, when the Chancellor delivers the Budget. Investors still lack clarity on the revised borrowing path, the tax mix, and the post-Budget gilt remit that will determine the government’s credibility in the bond market.
