Introduction: UK borrowing surges over forecasts in May
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The health of the British economy is centre stage today, as Andy Burnham wins the Makerfield by-election and declared that the Labour party has a “final chance to change”.
But the latest public finances, just released, show the challenges facing whoever is in Downing Street.
Britain borrowed £23.3bn in May to cover the difference between government income and spending – a surge of £5.4bn more than a year ago.
That’s the highest borrowing for any May since 2020, when the Covid-19 lockdown was in force.
Worryingly, it’s also also £5.6bn more than the £17.7bn forecast by the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog.
This means government borrowing for this financial year (since April) is running £7.7bn over the OBR’s forecasts – at £46.3bn.
That raises the risk that borrowing could be higher than forecast by the next budget, risking breaking Rachel Reeves’s fiscal rules – unless, of course, there is a leadership battle, and a new chancellor by the autumn…
The bigger picture is that this pushes the UK’s national debt up to 95.1% of GDP, levels last seen in the early 1960s
ONS senior statistician Tom Davies says:
“Borrowing in the first two months of the financial year was nearly £9 billion higher than the same period of 2025.
“Spending on debt interest, public services, investment and benefits all increased in May 2026, compared with last May, more than outweighing higher tax receipts.”
The agenda
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7am BST: UK retail sales report for May
-
7am BST: UK public finances report for May
-
11.30am BST: Bank of Russia interest rate decision
Key events
For markets, the key question following the Makerfield by-election is whether this political shift translates into a change in the policy framework, explains Modupe Adegbembo, economist at investment bank Jefferies.
That’s because the binding constraint on the government is not ideology but fiscal space and execution capacity, Adegbembo explains:
Under Burnham, his comments suggest the overarching macro framework would be largely unchanged. He has committed to existing fiscal rules and manifesto tax constraints, underscoring the limited room for policy easing. At the same time, he has provided little indication that he would seek to reduce public spending, having already pledged to keep the pension triple lock and, at times, signalling support for policies with a significant fiscal cost, such as compensation for WASPI women (though he later ruled out compensation). While he has shown some willingness to adjust policies, we continue to think the thrust of policy remains constrained by the fiscal backdrop.
The key shift is likely in political emphasis, with greater weight on the soft-left and Burnham’s “Manchesterism”, rather than a material loosening of the framework. “Manchesterism” looks less about fiscal expansion and more about place-based partnerships with the private sector, alongside greater use of regulatory levers, sector oversight and procurement to deliver policy at the margin. This is a shift investors may be underestimating.
Bank of England to test how private credit would handle a 1970s-style economic crisis
Kalyeena Makortoff
The private credit and private equity industries will reveal how they would respond to a “severe but plausible” economic shock involving surging inflation, a 30% drop in key stock markets, and major disruption to the booming AI sector, as part of a world-first test unveiled by the Bank of England.
The stress test scenario, released this morning, covers a global shock lasting five years, starting with a surge in geopolitical tensions that leads to fragmented global trade and supply chains. Jitters filter through, leading to CPI inflation of 7%, a hike in borrowing costs and trigger 30% declines in the FTSE All Share Index and a 35% drop in the S&P 500 within the first year.
In this scenario the UK suffers a 1970s style economic crisis, marked by a sharp drop in trade and hike in import costs, hitting company revenues. Tech, consumer discretionary and industrial sectors are hardest hit, though the BoE has made sure to outline specific impacts to the AI sector, which has been fuelled by private credit investments:
Expectations of future disruption from artificial intelligence (AI) weigh on valuations in software and services sectors, particularly in companies judged as having weaker competitive advantages or a ‘smaller moat’ as a result of AI. Disruption to supply chains and weaker demand also weighs heavily on hardware.
At the same time, AI-development is hit by higher energy prices and a shortage of key hardware components. This increases the costs for users of AI and slows the development of new models, meaning the near-term productivity gains from AI are limited.
The stress test is meant to map out potential risks linked to the private market boom, including whether the private credit and private equity sectors could end up amplifying financial and economic shocks.
It’s a first step towards understanding how influential private markets become within the financial system, having long been criticised for a lack of transparency.
It will be quite an involved process, with results due to be released to the public in early 2027.
Burnham’s “Manchesterism” is already reshaping Labour’s debate
Investment bank Cavendish argues that Andy Burnham is already reshaping the government agenda.
In a new report after the Makerfield by-election, Cavendish point out that this is particularly important for water and transport companies, saying:
The agenda arrives before the man. This is the part that matters even if Burnham never reaches Number 10. His platform – “Manchesterism” – is already reshaping Labour’s debate, and the soft-left network behind it is ascendant regardless of the result.
It names specific sectors and sets out to change the terms on which they operate: increased scrutiny of tech, greater public control of energy, the sharpest exposure of all in water, bus and rail franchising in transport, a for-profit care model it wants to dismantle, and around £40bn of borrowing to build.
Any organisation in or near those sectors is already inside the policy, whether it has noticed or not.
UK two-year gilt yield rises to one-week high after by-election and borrowing data
A week is a long time in politics, and also in the bond markets!
Reuters has spotted that short-term British government bond yields have risen to a one-week high on Friday, increasing slightly more than those for German debt, after this morning’s higher-than-expected borrowing numbers and an election victory for Greater Manchester Mayor Andy Burnham.
Two-year gilt yields rose to their highest since June 12 at 4.25%, up more than 6 basis points on the day and rising around 2 bps more than equivalent German bonds.
Water company shares drop after Burnham win
Shares in UK water companies are dropping in early trading, as Andy Burnham’s by-election win raises the prospect of nationalisation.
United Utilities, which provides water and wastewater services in the North West of England, are down 1.3%.
Severn Trent, which operates across the Midlands, South West, and Wales, are down 1.2%
Last weekend, the Guardian reported that bringing water and energy into public control would be at the heart of Burnham’s agenda should he become prime minister.
Several close allies of Burnham have said he wants to take over broad swathes of UK utilities in an effort to improve performance and potentially reduce bills for consumers, with one saying:
“When Andy says he wants the public to have control over ‘the essentials of life’, we should believe him. He is completely serious.”
That process would involve the government taking over water companies as they either fail (yes you, Thames Water) or their franchises come up for renewal.
UK bond yields on the rise
British government borrowing costs have jumped at the start of trading in the bond market.
Investors are digesting the jump in UK’s budget deficit in May, Andy Burnham’s victory in Makerfield, and a breakdown in the US-Iran peace talks.
The yield, or interest rate, on UK 10-year bonds has risen by 5 basis points (0.05 of a percentage point) to 4.799%.
30-year bond yields are up almost 6bps, at 5.5%.
Traders could be concluding that a Burnham premiership (should he win a leadership battle) might increase spending and borrowing, which would push up bond yields.
But… other government bond yields are also rising, although not quite as rapidly as for UK bonds. German 10-year bund yields are up 3.5bps this morning.
That tracks a rise in the Brent crude oil price, back over $80 a barrel, after planned peace talks between the US and Iran in Switzerland today were cancelled as Hezbollah targeted Israeli forces and Israel carried out a wave of airstrikes in south Lebanon which killed at least 16 people.
Conservatives: Borrowing is out of control
Shadow chancellor Mel Stride has claimed that UK borrowing is ‘out of control’, saying:
Borrowing is out of control – up by 30% compared to last year – and now we’re about to see what a real left wing Labour government looks like under Andy Burnham.
Burnham claims he is committed to the fiscal rules, yet when asked he could not even say what they are. The bond markets are watching nervously and we have already been paying a Burnham Penalty on our borrowing costs. Meanwhile, Reform have been busy pledging tens of billions in unfunded promises in their desperation to win in Makerfield.
The Conservatives are the only party with a plan to balance the books by getting spending under control, especially the welfare bill, in line with our Golden Economic Rule.
[Reminder, the national debt rose, from 65% of GDP to 94% of GDP, during the Conservative’s last stint in power, from 2010 to 2024]
Chief Secretary to the Treasury Lucy Rigby has pinned the blame for the rise in borrowing on the Middle Est crisis, saying:
“Inflation has held steady and unemployment has fallen this week, but the war in the Middle East has clearly had an impact on economies around the world.
“We have the right economic plan to deal with these challenges – protecting families and businesses from rising costs, while cutting borrowing at a faster rate than any other G7 economy.”
[Reminder: increased inflation drove up the cost of repaying index-linked government bonds]
Hot weather boosts UK retail sales
There is some encouraging economic news this morning – retail spending across Britain jumped by 1.2% in May.
Hot weather and sales offers encouraged consumers into the shops last month, meaning retail sales volumes more than bounced back after a 1% fall in April. Volumes were 3.2% higher than in May 2025.
Retailers reported that hot weather in May boosted sales of items such as fans and paddling pools, according to the Office for National Statistics, with department stores also benefiting from promotions and the hot weather.
Hai-Ly Nguyen, associate partner at McKinsey & Company says:
“Retail sales volumes rose 3.2% year-on-year, helped by the hottest UK May day on record and a late bank holiday. But, if you look at the three-month trend, sales are up just 0.4%, pointing to a heat-driven spike rather than a turning point.”
“Department stores and online drove the lift. For non-store retailers they saw a 6.1% monthly rise, the largest since February 2025, taking online share to 28.8%. That channel shift is being reinforced by a structural one: our European research shows 38% of consumers now use AI to decide what to buy, with 63% to compare brands, prices and reviews.”
Why Andy Burnham’s by-election victory matters for the public finances
Martin Beck, chief economist at WPI Strategy, has warned that the underlying picture of the UK public finances “remains uncomfortable”, even if the US-Iran deal helps to ease inflation.
He points out:
The deficit is still large, debt interest is still absorbing a painful share of revenue, and the tax burden is already heading for post-war highs. There is no easy escape route through either borrowing or taxation.
“That is why Andy Burnham’s by-election victory matters for the public finances. It does not change the arithmetic overnight, but it changes the politics around the arithmetic. A serious Labour leadership challenge would raise a simple question for markets: is the governing party about to shift towards higher spending, looser fiscal rules and a more relaxed attitude to borrowing?
“Burnham’s past argument that governments should not be “in hock” to bond markets may play well politically, but it is not a fiscal strategy. Any Prime Minister inheriting an annual deficit of well over £100bn would quickly discover that the gilt market is not an optional audience.
Beck concludes that the gilt market is now the hard constraint on British politics:
A Burnham premiership might change the language of economic policy, but it 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.”
UK borrowing: what the experts say
Emeritus professor Joe Nellis, economic adviser at MHA, warns that the UK public finances are “not in comfortable territory”, after borrowing jumped by £5.4bn year-on-year last month:
Public sector net borrowing came in at £23.3bn in May, showing the continuing pressure on the UK’s public finances and the difficult choices that lie ahead for the government and the Treasury for the rest of this financial year.
Borrowing in May was only slightly below the exceptionally high level recorded for April, remaining very high by historical standards. The latest data once more highlight the difficulty of balancing public-sector spending requirements with the government’s pledge to keep public finances on a sustainable path.
A number of factors continue to weigh heavily on the fiscal position. Debt interest payments remain elevated, public services are under significant strain, and weaker economic growth risks limiting the pace of tax revenue growth into the Treasury coffers. At the same time, seemingly unending demands for more and more spending, particularly on health, defence and infrastructure, show little sign of easing up.
The implications reach far beyond just the monthly borrowing numbers themselves. The figures will shape expectations about the Chancellor’s room for manoeuvre ahead of the Autumn Budget and will influence decisions on taxation, public spending and borrowing for the remainder of the financial year. The UK is far removed from the extraordinary borrowing levels seen during the pandemic, but the public finances are not in comfortable territory.
This chart shows how UK government borrowing has been higher so far this financial year (light blue) than in the 2025-26 financial year (dark blue).
How government spending rose in May
Today’s public finances report also shows how inflation drove up the cost of servicing the national debt in May.
The Office for National Statistics reports that the debt interest bill increased by £4.1bn to £11.7bn, due to movements in the Retail Prices Index (RPI) of inflation.
Government spending on services, and benefits such as pensions, both rose too:
The ONS explains:
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central government departmental spending on goods and services increased by £2.2bn to £39.6bn, as inflation increased the cost of providing public services
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net social benefits paid by central government increased by £1.2bn to £28.4bn; this was largely caused by inflation-linked increases in many benefits, and earnings-linked increases to State Pension payments
Introduction: UK borrowing surges over forecasts in May
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The health of the British economy is centre stage today, as Andy Burnham wins the Makerfield by-election and declared that the Labour party has a “final chance to change”.
But the latest public finances, just released, show the challenges facing whoever is in Downing Street.
Britain borrowed £23.3bn in May to cover the difference between government income and spending – a surge of £5.4bn more than a year ago.
That’s the highest borrowing for any May since 2020, when the Covid-19 lockdown was in force.
Worryingly, it’s also also £5.6bn more than the £17.7bn forecast by the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog.
This means government borrowing for this financial year (since April) is running £7.7bn over the OBR’s forecasts – at £46.3bn.
That raises the risk that borrowing could be higher than forecast by the next budget, risking breaking Rachel Reeves’s fiscal rules – unless, of course, there is a leadership battle, and a new chancellor by the autumn…
The bigger picture is that this pushes the UK’s national debt up to 95.1% of GDP, levels last seen in the early 1960s
ONS senior statistician Tom Davies says:
“Borrowing in the first two months of the financial year was nearly £9 billion higher than the same period of 2025.
“Spending on debt interest, public services, investment and benefits all increased in May 2026, compared with last May, more than outweighing higher tax receipts.”
The agenda
-
7am BST: UK retail sales report for May
-
7am BST: UK public finances report for May
-
11.30am BST: Bank of Russia interest rate decision
