Britain’s public finances came under renewed pressure in May as government borrowing hit £23.3bn, the highest for the month since the depths of the Covid-19 pandemic, official figures showed.
Public finances under strain
The Office for National Statistics reported that the government borrowed £5.4bn more than in May last year to cover the gap between income and spending. The figure was also £5.6bn above the £17.7bn forecast by the Office for Budget Responsibility, the fiscal watchdog. Borrowing for the first two months of the financial year now stands at £46.3bn – £7.7bn more than the OBR had pencilled in and £8.9bn higher than the same period in 2025.
Central government debt interest payable reached a record high for any May at £11.7bn, up £4.1bn on a year earlier. The ONS said this was driven by movements in the Retail Prices Index of inflation, with a “capital uplift” on index-linked bonds adding £4.9bn to the bill. Spending on public services also rose, with central government current expenditure up £6.4bn to £39.6bn, as inflation pushed up the cost of providing goods and services. Net social benefits rose by £1.2bn to £28.4bn, largely because of inflation-linked increases to benefits and earnings-linked rises in state pension payments.
As a result, the UK’s public sector net debt is provisionally estimated at 95.1% of GDP – a level not seen since the early 1960s. “Borrowing in the first two months of the financial year was nearly £9bn higher than the same period of 2025,” said Tom Davies, senior statistician at the ONS. “Spending on debt interest, public services, investment and benefits all increased in May 2026, compared with last May, more than outweighing higher tax receipts.”
Emeritus professor Joe Nellis, economic adviser at MHA, described the borrowing figures as “not in comfortable territory”, adding that debt interest payments remained elevated, public services were under strain and weaker economic growth risked limiting tax revenue growth.
Political fallout and the bond market
Andy Burnham’s victory in the Makerfield by-election has injected fresh uncertainty into the outlook for the public finances, with investors closely watching the implications for fiscal policy. The Greater Manchester mayor, who declared that Labour has a “final chance to change”, is now seen as a potential contender for the party leadership, raising the prospect of a shift in the government’s economic stance.
UK government bond yields have risen as traders digest the combination of higher-than-expected borrowing, Burnham’s win and the breakdown of US-Iran peace talks. The yield on two-year gilts rose to 4.25%, its highest since 12 June, while 10-year yields climbed 5 basis points to 4.799% and 30-year yields hit 5.5%. Analysts have begun referring to a “Burnham penalty” on borrowing costs.
Dan Coatsworth, head of markets at AJ Bell, said there was potential for gilt yields to keep rising if Sir Keir Starmer “doesn’t go quietly”. He noted that Friday’s moves reflected the risk that Starmer would not step aside without a contest, alongside the impact of rising oil prices after the collapse of the US-Iran peace deal. “Over the coming days, the bond market will look for clues on Burnham’s chances for getting the top job, and how he might steer Labour in a different direction,” Coatsworth said.
Neil Wilson, investor strategist at Saxo UK, said markets were already worrying about the result from Makerfield because of the uncertainty surrounding a leadership race and, more importantly, the likelihood of “a crowning of Burnham as PM and leftwards lurch by the government as he is widely seen as the least market friendly option”. He added that he would not be surprised if multi-year highs on 10-year and 30-year yields were tested again as Burnham sets out his policy ideas, though the macroeconomic backdrop had shifted since early May.
Alexandros Xenofontos and Christopher Granville at TS Lombard said gilts were “constrained by the return of domestic political risk”, posing the question of whether the next Labour leader would preserve the Starmer-Reeves fiscal bastion, shift left through funded tax-and-spend, or start testing the fiscal rules.
The rise in bond yields has also put the Bank of England’s quantitative tightening programme under scrutiny. Professor Costas Milas of the University of Liverpool Management School said the MPC should not halt or reverse its QT policies, arguing that the central bank should not intervene with Labour’s political infighting and that QT had reduced CPI inflation by 1.4 percentage points.
Modupe Adegbembo, economist at Jefferies, said the binding constraint on the government was not ideology but fiscal space and execution capacity. Under Burnham, he said, the overarching macro framework would be largely unchanged: he has committed to existing fiscal rules and manifesto tax constraints, but has given little indication he would seek to reduce public spending. The key shift is likely to be one of political emphasis, with greater weight on “Manchesterism” – place-based partnerships with the private sector, regulatory levers and sector oversight – rather than a material loosening of the framework.
Investment bank Cavendish argued that Burnham’s platform is already reshaping Labour’s debate, particularly for water and transport companies. “The agenda arrives before the man. This is the part that matters even if Burnham never reaches Number 10,” the bank said, pointing to increased scrutiny of tech, greater public control of energy, and around £40bn of borrowing for infrastructure.
Shares in water companies have dropped in early trading, with United Utilities down 1.3% and Severn Trent down 1.2%, as investors price in the prospect of nationalisation. The government has also formally objected to the proposed £10bn rescue deal for Thames Water, with Environment Secretary Emma Reynolds writing to Ofwat to say the creditors’ bid would place an “undue burden” on customers.
Shadow chancellor Mel Stride said borrowing was “out of control” and warned that the bond markets were watching nervously. “We have already been paying a Burnham penalty on our borrowing costs,” he said. Chief Secretary to the Treasury Lucy Rigby blamed the Middle East crisis for the rise in borrowing, arguing that the government had the right economic plan to deal with the challenges.
Martin Beck, chief economist at WPI Strategy, warned that the underlying picture of the public finances “remains uncomfortable” and that a Burnham premiership would not abolish the arithmetic. “The next Labour leader, whoever it is, will still face the same brutal equation: weak growth, high borrowing, expensive debt and very little room for manoeuvre.”
Economic data and corporate news
Retail sales volumes in Great Britain jumped by 1.2% in May, exceeding forecasts and reversing a 1% decline in April, the ONS said. Hot weather and sales offers boosted purchases of fans and paddling pools, while department stores also benefited. Volumes were 3.2% higher than a year earlier, though the three-month trend showed only a 0.4% increase, leading Hai-Ly Nguyen of McKinsey to describe it as “a heat-driven spike rather than a turning point”. Online retailers saw a 6.1% monthly increase, taking their share of total sales to 28.8%.
Company insolvencies in England and Wales fell by 10% month-on-month in May to 1,868, down 16% from a year earlier, but remained above historical levels because of sustained cost pressures. In contrast, personal insolvencies rose 10% year-on-year to 11,223 individuals, with little change from April.
The Bank of England unveiled a world-first stress test for the private credit and private equity industries. The scenario involves a severe economic shock lasting five years, with CPI inflation hitting 7%, a 30% drop in the FTSE All Share index and a 35% fall in the S&P 500 within the first year. The test also simulates disruption to the AI sector, with higher energy prices and hardware shortages limiting productivity gains. Results are due in early 2027.
Asda’s widening loss
Asda slumped to a near £1bn pre-tax loss last year, as the supermarket chain embarked on a price war and overhauled its IT systems. Losses widened from £599m in 2024 to £989m, reflecting an aggressive strategy by executive chairman Allan Leighton to make Asda 5% to 10% cheaper than rivals Tesco, Sainsbury’s and Morrisons. Total sales including fuel fell 3.6% to £25.9bn, with like-for-like sales down 3.1%.
The loss included £656m of one-off costs, notably £284m related to Project Future, the separation of Asda’s IT from former owner Walmart, and a £344m impairment on its £8bn property portfolio. Total spending on Project Future has now reached about £1.2bn. Despite the loss, Asda reduced net debt by £500m to £3.1bn and ended the year with £2.1bn in total liquidity. “The reported loss does not reflect the underlying financial strength of the business – and continued powerful cash generation,” an Asda spokesperson said, adding that the company had the flexibility to continue investing in its long-term turnaround.
