By William Schomberg
LONDON, May 22 (Reuters) – Britain’s public finances showed the biggest shortfall since the COVID-19 pandemic in April in what could be an early taste of the budget hit facing finance minister Rachel Reeves caused by the Iran war.
Borrowing during the month was 25% higher than in April last year at 24.3 billion pounds ($32.63 billion), the second-highest borrowing for April on record, official figures showed on Friday.
A Reuters poll of economists had pointed to a 20.9 billion-pound deficit in April, the first month of the financial year.
“This provides an early sign of the deterioration in the public finances that is inevitable over the coming quarters,” Ruth Gregory, deputy chief UK economist at Capital Economics said.
Reeves, who has a target of balancing day-to-day spending with tax revenues by the end of the decade, is under pressure to help turn around Prime Minister Keir Starmer’s low standing in opinion polls which could force him out of his job.
The Iran war has made Reeves’ challenge all the harder by raising the risk of an economic slowdown which would hurt tax revenues – data released separately on Friday showed retail sales fell by the most in nearly a year in April.
Furthermore, the conflict has already pushed up borrowing costs and is adding to demands for more public spending to protect households and businesses facing an energy price shock.
Reeves said on Thursday that she would raise more tax from oil and gas companies to fund some support measures.
Friday’s data from the Office for National Statistics showed government receipts rose by 2.9% in April from the same month in 2025 while spending was up 6.5%.
Projections drawn up by Britain’s budget forecasters before the Iran war showed public sector borrowing was expected to shrink to 3.6% of gross domestic product in the current tax year. That would be the smallest deficit since before the COVID-19 pandemic.
However, Gregory at Capital said the combination of energy price support measures, higher government borrowing costs and weaker economic growth was likely to swell the deficit to 4.6% of GDP in the 12 months to end of March 2027.
“Overall, the big picture is that the UK’s public finances are fragile. That won’t change whoever is prime minister,” she said.
Investors are nervous about the possibility of a change in political leadership in Britain with many Labour lawmakers demanding that Starmer stand down. His most likely successor, Manchester mayor Andy Burnham, has said he would stick with the fiscal rules being pursued by Reeves.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said Burnham, if he moves into Downing Street, would have to take unpopular measures to remain on track to meet those rules.
“Tax hikes to fund spending plans could undermine growth and worsen the fiscal arithmetic,” Wood said.
Borrowing in the financial year which ended in March was 3 billion pounds lower than initially estimated at 129 billion pounds, or 4.2% of GDP, down from 5.2% in the 2024/25 tax year, the ONS said.
($1 = 0.7448 pounds)
(Writing by William Schomberg; editing by Philippa Fletcher)
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