UK borrowing undershoots forecast, but Lords peers urge 'significantly larger' fiscal buffer
New official figures show the UK government borrowed £132 billion in the financial year ending March, a slight undershoot of the £132.7 billion forecast by the Office for Budget Responsibility (OBR), according to the Office for National Statistics. The total was £19.9 billion less than the £151.9 billion borrowed in the previous year.
For March alone, public sector net borrowing came in at £12.6 billion, which was £1.4 billion lower than a year earlier, although City economists had expected a lower figure of £10.3 billion. The annual number was better than expected after upward revisions for the previous two months: January’s surplus was revised up to £32.2 billion, while February’s borrowing was revised down from £14.3 billion to £12.8 billion.
A tighter-than-expected fiscal picture
Chancellor Rachel Reeves announced £26 billion in tax rises in her November budget to lower debt and offset rising spending on public services and infrastructure. Her fiscal rule requires the government to fund day-to-day spending with taxes by the end of the parliament.
In February, the chancellor said her buffer — or headroom — against that rule had increased to £23.6 billion from £21.7 billion at the time of the November budget. The Lords report cites a figure of around £22 billion for the buffer, which it says some of is expected to be eroded by the impact of the Iran war.
The Resolution Foundation has forecast that a worsening Middle East conflict could deal a £16 billion hit to UK public finances by 2030, wiping out nearly three-quarters of the headroom. The Guardian’s coverage notes that the conflict is expected to jeopardise the headroom, with rising inflation, potential job cuts, and higher interest rates eating into the target.
Lords committee: debt on unsustainable path
A separate report from the House of Lords economic affairs committee, titled Fortifying the Fiscal Framework, says the UK’s public debt is on an unsustainable trajectory and recommends that Reeves aim for a “significantly larger” buffer against her fiscal rules.
The committee, chaired by Labour peer Stewart Wood, includes former Treasury permanent secretary Terry Burns, economist Alison Wolf, and former chancellor Norman Lamont (who stepped down after the inquiry was completed). The report criticises successive governments for treating fiscal buffers as “war chests” to be run down to a minimum, “with all the destabilising implications for potentially chaotic policy change this brings.”
“Not just this government, but governments for a long time, have been operating at such a dangerously low level of fiscal headroom that they’re sort of operating near the cliff-edge,” Wood told the Guardian.
The report echoes warnings from the OBR, stating: “On current tax and spending settings, the UK is on a path to unsustainable debt levels. These issues should be of paramount concern for the government, not least because the last few decades have repeatedly shown the damage that can be done when fiscal rules are broken.”
The peers recommend a stricter interpretation of the debt fiscal rule, which requires debt to be falling in the last year of the forecast period. They argue that buffers should be “significantly larger” than the recent average, citing that between 2010 and 2022 the average buffer was around £30 billion — compared to the current level.
Perspectives
Government/chancellor perspective: The Treasury has emphasised that borrowing is falling and that the fiscal rules are being met. The chancellor’s February announcement of increased headroom suggests confidence in the current trajectory.
OBR/watchdog perspective: The OBR has warned of unsustainable debt levels, and the Lords committee echoes this, calling for more caution to avoid the instability of near-miss fiscal rule breaches.
Markets/analysts perspective: Some economists expected a higher March borrowing figure, but the revisions softened the annual outcome. Geopolitical risks, especially the Middle East conflict, are seen as the biggest threat to the fiscal headroom.
Taxpayer/consumer perspective: The combination of tax rises and potential cuts or inflation effects from conflict may strain household finances, though the borrowing undershoot may reduce immediate pressure on public finances.