Rachel Reeves has received an unexpected boost after official figures showed government borrowing fell by nearly £20 billion last year, providing temporary relief to public finances ahead of a more uncertain outlook driven by the Middle East conflict.
The Office for National Statistics estimated that public sector net borrowing fell by £19.8 billion, or 13.1pc, to £132 billion over the 12 months to the end of March — the lowest level since 2022-23 and slightly below forecasts from the fiscal watchdog.
The improvement was driven in part by stronger tax receipts following last April’s rise in employer national insurance contributions, which helped offset rising day-to-day spending across government departments.
As a result, borrowing stood at 4.3pc of GDP, its lowest share since before the pandemic, underscoring a gradual post-Covid recovery in the public finances.
However, the improvement is being overshadowed by growing concern in Whitehall that the war in Iran could sharply reverse the trend this year.
Economists and fiscal analysts have warned that higher energy prices, weaker growth and potential disruption to global trade routes could combine to push borrowing significantly higher in the current financial year, eroding the Chancellor’s already limited fiscal headroom.
Debt interest costs remain a key pressure point. While they dipped in March, they still rose over the year to £97.6 billion — the second-highest level on record — reflecting the continued impact of higher interest rates on government debt servicing.
The Office for Budget Responsibility had previously forecast borrowing of £132.7 billion, so the final outturn came in slightly better than expected, though economists caution that the margin of improvement is narrow.
Tom Davies, senior statistician at the ONS, said borrowing was “almost £20 billion lower than in the previous financial year”, noting that higher receipts more than offset increased spending across the state.
The Treasury welcomed the figures, with Chief Secretary James Murray saying the Government’s approach was helping to “keep costs down” and reduce borrowing.
But analysts warn the outlook is becoming increasingly fragile. A recent assessment by the Resolution Foundation suggested the conflict could add as much as £16 billion to borrowing by the end of the decade if it persists, potentially wiping out much of the Chancellor’s fiscal buffer.
Elliott Jordan-Doak of Pantheon Macroeconomics said the coming year would be “daunting” for the Treasury, pointing to higher-than-expected interest costs and limited scope for additional fiscal support without further borrowing.
For now, the latest figures offer a rare piece of breathing space for the Chancellor. But with energy markets volatile and geopolitical tensions elevated, officials privately acknowledge that the improvement may prove short-lived.
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