UK July Deficit Defies Forecasts as Inflation Drives Up Spending

Britain's public finances swung to an unexpected deficit in July, as higher government spending driven by inflation offset record tax collections. The shortfall of £1.8 billion ($2.5 billion) contrasts sharply with forecasts from economists, who had expected the month to end with a balanced budget.

The Office for Budget Responsibility had projected a £500 million surplus — which would have been the first July surplus since before the pandemic. Instead, the Office for National Statistics reported that central government spending on social benefits rose by £2 billion year-on-year, while outlays on goods and services, including staff costs, increased by £1.2 billion.

For the first four months of the financial year, borrowing reached £56.7 billion, exceeding the OBR's projection of £54.4 billion for that period. However, the current budget deficit — the measure that must be balanced by 2029/30 under existing fiscal rules — stood at £34.7 billion from April through July, below the OBR's forecast of £36.7 billion.

The figures underscore the fiscal constraints facing Prime Minister Andy Burnham and Finance Minister John Healey as they prepare the October budget, even as recent economic growth data has been surprisingly upbeat. Healey reiterated the government's commitment to fiscal discipline, describing it as essential for economic stability and national security, and pledged to maintain a buffer against global uncertainties.