UK government posts unexpected budget deficit in July as spending surge overwhelms record tax revenue

The UK government borrowed £1.8 billion in July 2026, a month when the Office for Budget Responsibility had penciled in a £500 million surplus. That’s not just a miss. It’s a £2.3 billion swing in the wrong direction, driven by a spending increase that swallowed what should have been a banner month for tax receipts.

The Office for National Statistics published the figures on August 21, revealing that even a record-breaking haul of self-assessment income tax couldn’t keep pace with the government’s outgoing cash. Chancellor John Healey now faces a tighter fiscal runway as he prepares his first Budget, scheduled for October 28.

Record tax revenue, bigger spending

July is typically one of the strongest months for Treasury coffers because it’s when self-assessment income tax payments land. This year was no exception on the revenue side: self-assessment receipts hit £17.1 billion, a £1.7 billion increase compared to July 2025.

Instead, the gains were more than offset by a £2 billion year-on-year jump in social benefits expenditure. Spending on goods and services added another £1.2 billion to the bill, and debt interest costs continued their upward creep.

The result: a deficit of £1.8 billion versus the £1.1 billion deficit recorded in July 2025.

For the first four months of the fiscal year, from April through July 2026, cumulative borrowing reached £56.7 billion. That’s £2.3 billion above OBR projections for the period, though still £6 billion lower than the same stretch in 2025.

The debt pile keeps growing

Public sector net debt stood at £2,984.9 billion at the end of July, equivalent to 94.1% of GDP.

What this means for Healey’s October budget

Chancellor Healey’s October 28 Budget will need to reconcile several competing demands. The government has made commitments on cost-of-living support, youth employment programs, and defense spending. With borrowing already running above forecasts, funding those priorities without further expanding the deficit will likely require either tax increases, spending cuts elsewhere, or some politically uncomfortable combination of both.

The gap between the OBR’s forecasts and actual borrowing numbers also raises questions about whether the fiscal watchdog’s projections for the full year will hold. If borrowing continues to overshoot by similar margins, the annual deficit could come in significantly higher than planned.

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