UK Public Finances Show 12.6 Billion-Pound Deficit in March

Britain's deficit narrows but fuel duty fall points to Iran war drag

Britain's Budget Deficit and the Impact of the Iran War

By Andy Bruce and William Schomberg

April 23 (Reuters) - Britain's budget deficit for the last financial year narrowed to a six-year low but official data published on Thursday also showed an early impact of the Iran war as consumers scaled back their spending on fuel which has shot up in price.

Government Borrowing Trends

Government borrowing in the 12 months to the end of March was equivalent to 4.3% of economic output - much bigger than before the COVID-19 pandemic but the smallest deficit since the 2019/20 financial year.

The gap of 132.0 billion pounds ($178.1 billion) was 0.7 billion pounds less than the most recent official forecast that underpins the budget plans of finance minister Rachel Reeves.

The total was down from 151.9 billion pounds in 2024/25.

Temporary High Point for Public Finances

Thursday's data could represent a temporary high point for Britain's public finances as the economic fallout from the Middle East conflict broadens - with a slump in fuel duty revenues offering a taste of what could lie ahead.

Investors deem Britain's economy to be more exposed than peers to rising energy prices and high inflation, prompting a sharp increase in government borrowing costs since the end of February which will further weigh on Reeves' budget plans.

The amount the government spends on servicing its debts reached 97.6 billion pounds in 2025/26, up from 85.4 billion pounds in the previous year and marking the second-highest figure in cash terms since 2022/23 when inflation soared after Russia's invasion of Ukraine, the ONS said.

Fuel Duty Fall Signals Iran War Hitting Consumers

FUEL DUTY FALL SIGNALS IRAN WAR HITTING CONSUMERS

Debt Costs and Budget Targets

Reeves has highlighted the need to bring down Britain's debt costs as she tries to keep her budget plans on track to balance day-to-day spending with tax revenues by the end of the decade.

That so-called current budget deficit was equivalent to 1.7% of gross domestic product in 2025/26, 0.9 percentage points lower than the previous financial year and the lowest value since the 12 months to March 2020, when it was 0.7% of GDP.

Early Warning Signs for the Economy

But in a reminder of how the Iran war could add to the challenge of meeting her target, Thursday's data showed revenue from fuel duty - which is set at a fixed level - fell to 1.76 billion pounds in March, the lowest for any month since July 2023.

While representing only a fraction of government revenue, the drop in fuel duty in response to higher prices for petrol and diesel could be an early warning sign of how the war might weaken activity across the economy and hit overall tax revenues.

Reeves has warned that the war is likely to harm tax revenues overall, rebuffing calls from opposition parties to redeploy any additional tax revenue generated from oil and gas producers and electricity generators.

The ONS said it would likely take some time before those revenues appear in the data.

Iran War Puts Pressure on Reeves' Budget Buffer

IRAN WAR PUTS PRESSURE ON REEVES' BUDGET BUFFER

IMF Growth Forecasts and Fiscal Headroom

Last week, the International Monetary Fund cut Britain's economic growth forecasts for 2026 by more than for any other Group of Seven nation due to the country's exposure to higher energy prices with its heavy use of natural gas.

"A more stagflationary backdrop is forecast to take shape, with speculation already building about the impact of weaker growth on the Chancellor's headroom," Nabil Taleb, economist at PwC UK, said, referring to the budget leeway Reeves maintains to make sure she meets her borrowing rules.

The Resolution Foundation said under a severe but plausible scenario for the Iran war's impact, about 16 billion pounds would be lost from Reeves' estimated headroom of 24 billion pounds, underscoring her limited options for helping households.

Fiscal Rules and Policy Recommendations

"The Chancellor should ensure any energy bill support is targeted and time-limited and make sure she stays within her fiscal rules given the risks to the public finances," Elliott Christensen, a senior economist at the think tank, said.

In March alone, the ONS reported public sector net borrowing of 12.6 billion pounds. Economists polled by Reuters had a median forecast of a 10.3 billion-pound deficit for the month.

($1 = 0.7412 pounds)

(Reporting by Andy Bruce; Editing by William Schomberg and Toby Chopra)