Key Highlights

  • ONS confirmed public sector net borrowing (ex banks) of £1.8bn for July 2026, around £2.3bn above the OBR's forecast path for the year to date.
  • The Chancellor is now John Healey, appointed by PM Andy Burnham on 20 July 2026 after Rachel Reeves left office alongside Keir Starmer's June 2026 resignation.
  • Estimated headroom against the government's stability fiscal rule has narrowed from roughly £23.6bn in March 2026 to below £8bn following the July data, according to the Resolution Foundation.
  • Public sector net Debt (ex banks) stood at £2,984.9bn, or 94.1% of GDP, at end-July 2026.
  • The first Healey Budget is scheduled for 28 October 2026, when updated OBR forecasts and any tax or spending decisions will be published.

Britain's public finances delivered another uncomfortable data point on 21 August 2026, when the ONS confirmed public sector net borrowing, excluding public sector banks, at £1.8 billion in July. That is a small number by the standards of a government that borrows tens of billions a month, but it lands awkwardly, roughly £2.3 billion above where the Office for Budget Responsibility had expected the year-to-date position to be. For Chancellor John Healey, barely a month into the job, it is an early reminder of how little room he has before his first Budget on 28 October.

The figures matter less for their size than for what they say about the trajectory of the public finances at a moment of political transition. Keir Starmer resigned as Prime Minister in June 2026, and Andy Burnham took office on 20 July, appointing Healey to the Treasury the same day. The new Chancellor inherits a fiscal position that looked more comfortable at the March 2026 Spring Statement than it does now, with higher energy prices and elevated borrowing costs having eaten into an already thin Margin for error.

What Happened?

The ONS bulletin, published on 21 August, showed borrowing excluding public sector banks of £1.8 billion, up £0.7 billion (68.7%) on July 2025. Central government receipts rose to £104.3 billion, up £4.6 billion (4.6%) year-on-year, with self-assessed income tax up £1.7 billion to £17.1 billion and VAT up £1.0 billion to £18.5 billion. Spending rose faster, reaching £110.7 billion, up £5.7 billion (5.4%), with debt interest climbing to £7.7 billion, up £0.7 billion on the same month last year.

For the financial year to date (April to July), cumulative borrowing stood at £56.7 billion, £6.0 billion lower than the same four months of 2025/26. That improvement, however, was smaller than the OBR had pencilled in at its March 2026 forecast, leaving the year-to-date position roughly £2.3 billion above the official trajectory. The public finances are improving year-on-year, but not by as much as the watchdog assumed.

The Resolution Foundation's senior economist, Elliott Christensen, put the dynamic bluntly: stronger growth "has failed to deliver a wider public finances windfall as the economic impact of conflict in the Middle East has taken its toll on borrowing costs." That conflict, which escalated from late February 2026, has pushed up wholesale energy prices and, in turn, both Inflation and the government's own financing costs.

The Numbers

The key figures, all for July 2026 unless stated: net borrowing excluding public sector banks was £1.8 billion, against £1.1 billion in July 2025. Year-to-date borrowing (April–July) was £56.7 billion, down from £62.7 billion a year earlier but roughly £2.3 billion above the OBR's March 2026 forecast path. Central government receipts were £104.3 billion; expenditure was £110.7 billion; the net cash requirement was £2.8 billion in the month and £62.9 billion for the year to date.

Debt interest payable was £7.7 billion in July alone, part of an annual bill the House of Commons Library estimates at around £109 billion in 2025/26 — about 3.6% of GDP and roughly 8% of public spending, among the highest shares in half a century. Public sector net debt excluding public sector banks stood at £2,984.9 billion at end-July, or 94.1% of GDP, down 0.8 percentage points from a year earlier even as the cash total kept climbing. A broader measure, public sector net financial liabilities, stood at £2,657.7 billion, or 83.7% of GDP.

Why It Matters

The overshoot is not, on its own, a crisis; £2.3 billion is a rounding error against a state that spends well over a trillion pounds a year. But it lands directly on the government's fiscal headroom — the margin by which the Chancellor is forecast to meet the "stability rule," requiring the current budget to balance or surplus by 2029/30. That headroom stood at roughly £23.6 billion at the March 2026 Spring Statement, according to Resolution Foundation estimates, but had already narrowed to around £10 billion by the time Healey took office in July, largely because of costs flowing from the Middle East conflict. Following the July data, the Foundation estimates the margin has narrowed further, to "below £8bn."

That matters because a Chancellor with single-digit-billion headroom has little scope to absorb further bad news — a weaker growth forecast, higher gilt yields, another energy shock — without raising taxes, cutting spending, or missing the fiscal rule. Christensen's assessment was direct: Healey "should use his first Budget to put the public finances on a firmer footing and ensure that any new policy announcements are fully funded."

Investor & Market Perspective

Gilt markets have been unusually sensitive to the political transition. Ten-year yields were trading around 5.06% on 21 August 2026, having spiked earlier in the summer when Burnham's appointment of Healey raised questions about whether the new government would seek "flexibility" within the fiscal rules. Thirty-year yields, more sensitive to long-run fiscal credibility, stood at 5.81% on the same date — levels that keep Britain's long-dated borrowing costs among the highest of any G7 economy.

For bond investors, the July figures reinforce rather than transform the existing narrative: borrowing needs remain above forecast, debt interest keeps climbing, and political uncertainty over fiscal stance is an added risk premium. Sterling has traded choppily. Equity investors in rate-sensitive sectors such as housebuilders, retailers and utilities face a genuine risk of further fiscal tightening at the Budget to protect the headroom.

What Happens Next?

The Bank of England's next MPC decision falls on 17 September 2026, followed by the August CPI release around mid-September and the next public sector finances bulletin in late September. These feed into the OBR's updated forecast, to be presented alongside Healey's first Budget on 28 October — the date on which any tax or spending measures, and the government's approach to the fiscal rules, will become clear.

Markets will watch closely for whether the government confirms it is retaining the existing fiscal rules unchanged, given earlier reports that Burnham had signalled openness to seeking "flexibility" within them. Any perceived loosening, without offsetting credibility measures, would likely be tested quickly by gilt markets given how sensitive they have already proven to political change in Downing Street.

Outlook

The £1.8 billion July borrowing figure is not, by itself, dramatic. But it crystallises the bind facing Britain's new Chancellor: growth has not translated into a fiscal windfall, external shocks continue to erode headroom that was never generous, and the debt-servicing bill keeps rising. With barely two months until his first Budget, John Healey faces a narrowing set of Options — and markets will be reading every subsequent data release as a signal of how that Budget is likely to be shaped.