March 2026 UK Government Borrowing Deficit Higher Than Forecast as Inflation and Gilt Yields Rise

Overview

The UK’s public finances closed the 2025/26 fiscal year with borrowing figures that were slightly better than the Office for Budget Responsibility (OBR) expected — but still historically high. March 2026 borrowing came in above forecasts, and the broader economic backdrop has shifted sharply due to the Iran war, rising inflation, and higher gilt yields. These pressures point to a more challenging fiscal outlook for 2026/27 than the Spring Forecast anticipated.

March 2026 Borrowing: Higher Than Expected

The public sector net borrowing requirement (PSNB ex) for March 2026 was £12.6bn, a figure that:

• Was £2.1bn above the OBR’s revised monthly profile
• Exceeded Reuters’ consensus by £2.3bn
• Remained £1.4bn lower than March 2025
• Marked the lowest March deficit since 2022 (nominal terms)

Despite being lower than the previous two years, the March deficit was still elevated by historical standards and close to levels seen during the pandemic.

2025/26 Full‑Year Borrowing: Slightly Better Than OBR Forecast

The first estimate for total borrowing in 2025/26 is £132.0bn, which is:

• £0.7bn below the OBR’s Spring Forecast
• £19.9bn lower than 2024/25
• Still the fourth‑highest April–March borrowing since monthly records began in 1993

These numbers will be revised over the coming months. For context, the first estimate for 2024/25 borrowing was £151.9bn — but monthly revisions ranged from £152.7bn to £146.3bn before settling.

Current Budget Position

The current budget — which must be balanced by 2029/30 under the Chancellor’s fiscal rules — showed:

• A £5.8bn surplus in March, £3bn higher than a year earlier
• A £50.9bn deficit for the full year, £15.2bn better than 2024/25
• A figure £1.7bn above the OBR’s March projection

This improvement reflects stronger tax receipts and lower‑than‑expected spending in some areas, but the overall deficit remains large.

Public Debt Continues to Rise

Public sector net debt excluding banks (PSND ex) reached:

• £2.91 trillion
• 93.8% of GDP, up from 93.2% a year earlier

Meanwhile, the Chancellor’s preferred measure — public sector net financial liabilities (PSNFL ex) — rose to:

• £2.58 trillion
• 83.3% of GDP
• £144.6bn deeper in the red than a year ago

Debt ratios remain close to multi‑decade highs, limiting fiscal headroom.

Interest Payments: Temporary Relief Before a Rebound

Interest payments in March 2026 were £3.2bn, significantly lower than February’s figure due to:

• A 0.5% fall in RPI between December and January
• A resulting £3.3bn reduction in index‑linked gilt principal

However, this relief is temporary. The RPI rose 0.44% between January and February, meaning April’s interest bill will unwind much of the March benefit.

For the full year, interest spending reached £97.6bn, up £12.2bn on 2024/25.

Why the 2026/27 Outlook Is Now Much Worse

While the 2025/26 outturn appears broadly aligned with expectations, the fiscal environment has changed dramatically since the OBR’s Spring Forecast.

Key pressures for 2026/27:

• Higher inflation driven by the Iran war
• Rising gilt yields, increasing the cost of new borrowing
• Larger index‑linked gilt adjustments as RPI accelerates
• Weaker economic confidence, potentially reducing tax receipts

In short, the assumptions underpinning the Spring Forecast no longer hold. Borrowing in 2026/27 is now likely to exceed expectations unless economic conditions stabilise.

Conclusion

The UK’s March 2026 borrowing figures show a deficit that was higher than forecast but still lower than in recent years. Full‑year borrowing came in close to the OBR’s projection, yet the broader fiscal picture is deteriorating. With inflation rising again and gilt yields climbing, the government faces a tougher‑than‑expected fiscal environment in 2026/27.

The headline numbers may look stable, but the underlying trend is moving in the wrong direction.