21st August 2026
Britain's public finances are showing signs of improvement. But before anyone starts celebrating, there is a rather large qualification.
The Government is still borrowing billions of pounds, the national debt is hovering just below £3 trillion and the amount being borrowed so far this financial year is £2.3 billion higher than the official forecast.
The latest figures from the Office for National Statistics therefore provide a mixed message for the Chancellor as the Government heads towards the October Budget.
The headline figure for July is particularly interesting. The public sector borrowed £1.8 billion during the month, which was £700 million more than in July last year and £2.3 billion more than the Office for Budget Responsibility had expected.
That sounds alarming until the figures are put into their wider context.
During the first four months of the financial year, from April to July, public sector borrowing amounted to £56.7 billion. That was actually £6 billion, or 9.6%, lower than during the same period last year.
So Britain is borrowing less.
The problem is that it is not borrowing quite as little as the Government's official watchdog had hoped.
The taxman is collecting more
One of the more encouraging aspects of the figures is the performance of tax receipts.
Central government received £372.8 billion during the first four months of the financial year, £22.6 billion more than during the corresponding period last year.
Tax receipts alone increased by £19.1 billion.
VAT receipts were up by £5.2 billion, income-related taxes by £7.8 billion and corporation tax by £4.2 billion. Corporation tax receipts were particularly strong, rising by 13% compared with the same period last year.
There was also a particularly strong July for self-assessed income tax, with receipts of £17.1 billion, £1.7 billion higher than a year earlier.
That is good news for the Treasury.
It demonstrates that the tax base is still generating substantial revenue.
But there is a catch.
The Government is spending that additional income almost as quickly as it is arriving.
Spending is rising too
Central government expenditure during the first four months of the financial year reached £443.3 billion, an increase of £21.7 billion, or 5.2%, compared with the same period last year.
Some of that increase is unavoidable.
Social benefit payments rose by £7.9 billion, largely reflecting inflation-linked increases and increases in State Pension payments linked to earnings.
Spending on goods and services increased by £5.4 billion, while transfers to local government increased by £2.4 billion.
Net investment also increased, by £3.7 billion.
This is an important point when looking at the borrowing figures.
The Government isn't simply spending money on new programmes and then borrowing to pay for them.
A significant part of the increase reflects the cost of maintaining existing public services and meeting commitments such as pensions and benefits.
That makes reducing the deficit considerably more difficult.
The Government is caught between two pressures
This is the fundamental problem facing the Chancellor.
On one side, tax receipts are increasing.
On the other, the cost of government is increasing too.
And the Government cannot simply assume that economic growth will solve the problem.
If the economy grows strongly, tax receipts should rise.
But if inflation remains high, some spending automatically increases as well. Pensions and many benefits are linked to inflation or earnings, while public-sector pay and the cost of purchasing goods and services are also affected by prices.
It creates something resembling a treadmill.
The Government can run faster without necessarily getting much closer to the destination.
Debt is the really uncomfortable number
Perhaps the most eye-catching figure in the entire report is the size of the national debt.
At the end of July, public sector net debt stood at approximately £2.985 trillion.
That was £95.9 billion higher than a year earlier.
Put another way, Britain is still adding to an enormous pile of existing debt.
The slightly better news is that debt as a proportion of the economy has fallen.
It stood at 94.1% of GDP in July, down from 94.9% a year earlier.
That might initially appear contradictory. How can debt increase by almost £96 billion while the debt-to-GDP ratio falls?
The answer is that the economy itself has grown.
The ratio is therefore measuring the size of the debt against the country's capacity to generate income.
If GDP grows faster than debt, the ratio can fall even though the absolute amount owed continues to rise.
That distinction is extremely important.
What does £3 trillion of debt actually mean?
It is worth stepping away from the enormous numbers for a moment.
When we hear that the Government owes almost £3 trillion, it can become almost meaningless because the figure is so large.
The important point is not simply the size of the debt.
It is the cost of servicing it.
Every pound spent paying interest on government borrowing is a pound that cannot be spent on hospitals, schools, defence, infrastructure or tax reductions.
And interest rates matter enormously.
When the Government borrows, it generally does so by issuing government bonds, known as gilts.
Investors buy those gilts and the Government pays interest.
The higher the interest rate demanded by investors, the more expensive it becomes to refinance existing debt and borrow new money.
This is one reason why the current public finances are considerably more difficult to manage than they were when interest rates were close to zero.
Inflation can make the figures jump around
There is another complication which ordinary households might find surprising.
Government debt interest isn't simply a fixed monthly bill.
Some government bonds are linked to inflation.
When inflation rises, the amount the Government ultimately has to pay on those bonds can rise as well.
The ONS says that in July, movements in the Retail Prices Index added £1.3 billion to debt interest payable through the capital uplift on index-linked gilts.
That illustrates something important about inflation.
Higher inflation doesn't merely hurt households through supermarket prices and energy bills.
It can also make government borrowing more expensive.
So when inflation returns, the Chancellor has another problem to deal with.
And this is where the October Budget becomes important
The Government's next Budget is scheduled for 28 October.
The latest figures will therefore be closely examined by the Treasury and the OBR before they produce their new forecasts.
The Chancellor has to make decisions about taxation and spending based not simply on what is happening today, but on what the Government believes will happen over the next several years.
That is where today's apparently modest £2.3 billion overshoot becomes significant.
It isn't an enormous sum in the context of government finances.
But it tells us that the Government's March forecasts are already proving slightly too optimistic in some areas.
And the OBR will have to decide whether that is simply temporary or evidence of a more persistent problem.
There is actually some good news
It would be wrong to portray the figures as entirely negative.
Borrowing during the first four months of the financial year is substantially lower than it was last year.
The current budget deficit has fallen by £6.9 billion, or 15.5%, to £37.5 billion.
The Government is therefore moving in the right direction.
The ONS also says that borrowing in the April-to-July period was equivalent to 1.8% of GDP, 0.3 percentage points lower than a year earlier. It was the 12th-lowest April-to-July borrowing figure since comparable monthly records began in 1993.
So the fiscal position isn't collapsing.
Quite the opposite.
It is gradually improving.
The difficulty is that Britain is starting from such a high level of debt and borrowing that gradual improvement isn't enough to make the problem disappear.
The Government's own rules reveal the problem
The Government has set itself fiscal targets requiring the current budget to be in surplus and public sector net financial liabilities to fall as a share of GDP by the financial year ending March 2030.
The latest figures show just how much work remains.
The current budget deficit was £48.9 billion in the year to March 2026, although that was £27.6 billion lower than the previous year.
Meanwhile, public sector net financial liabilities were initially estimated at 82.6% of GDP, 1.8 percentage points higher than a year earlier.
So although the Government is making progress on the deficit, its broader balance sheet is still under pressure.
There is another way of looking at government debt
It is also worth remembering that governments own things as well as owing money.
The ONS estimates that the public sector has substantial non-financial assets, including infrastructure and property, alongside financial assets.
Its broader measure of public sector net financial liabilities was 83.7% of GDP at the end of July, considerably below the 94.1% net debt figure.
That does not make the £3 trillion debt disappear.
It does, however, demonstrate why public finances are more complicated than simply adding up every government liability.
The Government owns roads, buildings, land, financial investments and other assets.
The question is whether those assets generate sufficient economic value to justify the liabilities accumulated against them.
What does all this mean for ordinary people?
Ultimately, public finance statistics eventually find their way into household finances.
If borrowing remains high, governments have fewer options.
They can raise taxes.
They can reduce spending.
They can allow debt to increase further.
Or they can hope that stronger economic growth increases tax receipts enough to improve the position without requiring particularly painful decisions.
The problem is that the final option is the one governments have the least control over.
And Britain has not exactly been experiencing spectacular economic growth.
That leaves the Chancellor facing difficult choices.
Scotland cannot escape the consequences
Although these are UK-wide figures, they matter enormously to Scotland.
The Scottish Government's budget depends heavily on funding from the UK Government, alongside Scotland's own revenues and other funding arrangements.
If the UK Government finds itself under increasing pressure to control spending, that inevitably creates implications for the public finances available to Scotland.
The same applies to Scottish households.
Changes to UK taxation, pensions, benefits, energy policy and public spending eventually affect people in every part of the country.
For rural Scotland, there can be additional pressures because the cost of delivering public services across large distances can be considerably higher.
That makes the October Budget particularly important for Scotland.
The real problem is not that Britain is bankrupt
It is worth avoiding the language sometimes used in political arguments about government finances.
Britain is not "bankrupt".
Governments are not households and cannot be judged by exactly the same rules.
The UK has a large economy, an established tax base and the ability to borrow in its own currency.
The issue is rather that the Government has limited fiscal space.
It cannot keep increasing spending indefinitely without eventually having to explain how it will be paid for.
And it cannot keep increasing taxes indefinitely without considering the effect on households, businesses and economic growth.
That is the trap.
The figures leave the Chancellor with a difficult autumn
The latest ONS figures are neither a disaster nor a triumph.
They show that the Government has reduced borrowing compared with last year.
They show that tax receipts are growing strongly.
They show that the current deficit is narrowing.
But they also show that spending is rising, debt remains close to £3 trillion and borrowing is running £2.3 billion above the OBR's expectations during the first four months of the financial year.
And there is another warning sign.
The ONS says that public sector borrowing has remained broadly between 4% and 5% of GDP since the end of the pandemic period.
That suggests that Britain has not yet returned to the much lower borrowing environment that existed before the financial crisis and pandemic.
The Government has made progress.
But it has not yet escaped the underlying problem.
The question Britain should really be asking
The temptation when these figures are released is to ask whether borrowing is up or down.
That is useful, but it misses the bigger issue.
The more important question is:
Can Britain grow its way out of its debt problem while maintaining the public services people expect and keeping taxation politically acceptable?
The July figures suggest the answer is not yet clear.
Tax receipts are rising, but so is spending.
Borrowing is falling, but not as quickly as forecast.
The debt ratio is falling, but the actual debt continues to increase.
And interest rates and inflation can still move the numbers in either direction.
That leaves the Chancellor with a difficult autumn.
The October Budget will have to demonstrate not simply that the Government can raise money or cut spending, but that it has a credible route towards getting Britain's finances onto a more sustainable footing.
For households and businesses, that matters because every government borrowing decision eventually becomes somebody's tax bill, public service or economic opportunity.
The latest ONS figures suggest that the Government has moved a little further down the road.
But it still has a very long way to go.
Rad the full ONS report HERE