23rd April 2026
The latest public finances report for the UK, covering the financial year ending March 2026, offers something rare in recent years: cautious optimism. While government borrowing remains historically high, the direction of travel has improved meaningfully.
Beneath the headline figures lies a story of stronger tax revenues, moderating deficits, and persistent but manageable pressures on spending and debt.
The Big Picture: Still High Borrowing, But Falling
The government borrowed £132 billion over the year. That’s a large number by any standard, but importantly, it is around £20 billion less than the previous year. In relative terms, borrowing now stands at 4.3% of GDP, indicating that the deficit is shrinking compared to the size of the economy.
This matters because fiscal sustainability isn’t just about the raw number—it’s about whether the economy is growing faster than debt. On that front, the UK is making incremental progress.
The Real Driver: Tax Revenues Are Surging
The most important force behind the improvement is a sharp rise in government income. Total receipts reached £1.12 trillion, an increase of over 8% year-on-year.
Three major sources explain this growth:
Income tax surged, reflecting higher wages and fiscal drag (more people moving into higher tax brackets).
VAT revenues rose, suggesting continued consumer spending strength despite economic pressures.
Corporation tax increased, pointing to resilient business profits in key sectors.
In simple terms, the government didn’t reduce borrowing mainly by cutting spending—it did so because it collected more money.
Spending: Still Rising, But Under Control
Government spending continues to grow, reaching just under £1.1 trillion. However, the increase (6.4%) is slower than the growth in revenue.
The biggest pressure comes from day-to-day departmental spending—particularly public sector wages and the lingering effects of inflation. This includes funding for services like healthcare, education, and public administration.
This creates a delicate balancing act:
Cutting spending too aggressively risks damaging public services and economic growth.
Letting it rise too quickly keeps borrowing elevated.
For now, the government appears to be letting spending rise, but at a slower pace than income—a key ingredient for deficit reduction.
The Deficit: A Meaningful Improvement
The current budget deficit—the gap between everyday spending and income—fell sharply to £50.9 billion, down more than £25 billion from the previous year.
This is a critical metric because it excludes investment spending and reflects the sustainability of day-to-day finances. A falling current deficit suggests the government is moving closer to covering its routine costs through taxation, which is a central fiscal goal.
Debt: The Stubborn Problem
Despite improvements elsewhere, debt remains the most persistent challenge.
Public sector liabilities now stand at 83.3% of GDP, having increased again over the year. This highlights a key reality: even when borrowing falls, debt can continue to rise if deficits persist.
Why this matters:
Higher debt means higher interest payments, which crowd out spending on public services.
It limits the government’s ability to respond to future crises.
It leaves the economy more exposed to interest rate shocks.
In short, the UK is slowing the pace of debt accumulation—but not yet reversing it.
What This Means for Taxes
The strong growth in tax revenues raises an important question: will taxes need to rise further?
Not necessarily in the short term. Much of the recent increase comes from “fiscal drag,” where inflation pushes people into higher tax brackets without explicit tax rate changes.
However, looking ahead:
If spending pressures persist (especially healthcare and pensions), taxes may need to rise further.
Alternatively, governments may rely more on stealth measures like freezing tax thresholds.
For individuals, this likely means the tax burden will remain high—even without headline tax hikes.
What This Means for Spending Cuts
The data suggests the government has not relied heavily on spending cuts to improve the fiscal position as yet.
But that may change. To meet longer-term fiscal targets, policymakers face tough choices:
Reduce the growth of public spending
Reform public services for efficiency
Delay or scale back major investment projects
The political challenge is significant: meaningful spending restraint is difficult without visible impacts on services.
What This Means for the Economy
From an economic perspective, the report sends mixed but generally positive signals.
On the positive side:
Strong tax receipts suggest underlying economic resilience.
A falling deficit reduces the risk of fiscal instability.
Improved public finances can support investor confidence.
On the downside:
High debt levels remain a structural vulnerability.
Continued high taxation may weigh on growth over time.
Limited fiscal space reduces flexibility in future downturns.
Overall, the economy appears stable, but not yet in a position of strong, self-sustaining growth.
The Bottom Line: Progress, Not Victory
The UK’s public finances are moving in the right direction. Borrowing is down, revenues are strong, and the deficit is narrowing. These are meaningful achievements after years of fiscal strain.
But the job is far from finished.
Debt is still rising, spending pressures remain intense, and difficult policy choices lie ahead. The current trajectory suggests gradual improvement rather than rapid transformation.
In that sense, this report doesn’t mark a turning point—but it does mark something just as important: steady, credible progress.
Read the full ONS report HERE