Author: Martin Wheatcroft

Government deficit hits £100bn in the first half of the financial year

Revisions and corrections help reduce the budget overrun to £7bn for the six months to September 2025, but the outlook remains bleak.

The UK government deficit hit £100bn in the six months to September 2025, according to the latest Office for National Statistics’ (ONS) monthly public sector finances release for September 2025, published on 21 October 2025. 

The report also revealed a provisional shortfall between receipts and public spending of £20bn last month. The deficit for the month was £1bn higher than the previous year, in line with the budget. The cumulative deficit was £12bn higher than the first half of 2024/25, and £7bn more than budgeted.

Month of September 2025

Provisional receipts and total public spending for September – £95bn and £115bn respectively – were each 8% more than the previous year.

Current spending included depreciation of £108bn, comparable to the £108bn monthly average in the first five months of the financial year. Net investment was £7bn, higher than the £4bn monthly average investment between April and August 2025.

Excluding net investment, the current budget deficit for the month was £13bn – £2bn more than in the same month last year, £1bn more than budgeted. This was offset by a £1bn underspend on net investment.

Six months to September 2025

The provisional deficit for the six months to September 2025 was £12bn (14%) more than in the same six months last year. This was £7bn higher than budget, which can be analysed as a £13bn budget overrun on the current budget deficit (current receipts less current spending), less a £6bn underspend on net investment.

Table 1 highlights the changes in year-to-date receipts, up 7% overall on last year’s equivalents. These increases were mostly driven by factors such as inflation and fiscal drag from frozen tax allowances. The 20% increase in national insurance revenues reflects the increase in employers’ national insurance.

The 9% increase in current spending over the year has been driven by public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

Net investment of £28bn in the first six months of 2025/26 was £1bn, or 4% higher than the same period last year. Capital expenditure of £46bn was up by £2bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £18bn were up by £1bn, offset by depreciation of £36bn, up by £2bn.

Table 1  Summary receipts and spending

6 months to Sep2025/26
£bn		2024/25
£bn		Change
%
Income VAT145133+9%
VAT104100+4%
National insurance9882+20%
Corporation tax5248+8%
Other taxes115112+3%
Other receipts6362+2%
Current receipts577537+7%
Public services(363)(334)+9%
Welfare(155)(146+6%
Subsidies(18)(17)+6%
Debt interest(77)(67)+15%
Depreciation(36)(34)+6%
Current spending(649)(598)+9%
Current deficit(72)(61)+18%
Net investment(28)(27)+4%
Deficit(100)(88)+14%

Budget for the rest of the financial year

The deficit is budgeted to be £118bn for the full year ending 31 March 2026, comprising £93bn in the first half of the year to September 2025 and £25bn in the second half of the year.

Borrowing and debt

Table 2 summarises government borrowing in the first six months of the financial year, taking public sector net debt to a provisional £2,916bn on 30 September 2025. This comprised £100bn in public sector net borrowing (PSNB) to fund the deficit and a further £6bn to fund government lending and working capital requirements.

The table also illustrates how the debt-to-GDP ratio increased by 1.6 percentage points, from a revised 93.7% of GDP at the start of the financial year to 95.3% on 30 September 2025, with incremental borrowing of £106bn, equivalent to 3.5% of GDP. It was partly offset by 1.9 percentage points due to inflation and economic growth adding to GDP.

Table 2  Public sector net debt and net debt/GDP

6 months to Sep2025/26
£bn		2024/25
£bn
PSNB10088
Other borrowing6(14)
Net change10674
Opening net debt2,8102,686
Closing net debt2,9162,760
PSNB/GDP3.3%3.1%
Other/GDP0.2%(0.5%)
Inflating away(1.9%)(2.7%)
Net change1.6%(0.1%)
Opening net debt/GDP93.7%94.4%
Closing net debt/GDP95.3%94.3%

Public sector net debt on 30 September 2025 of £2,916bn comprised gross debt of £3,368bn less cash and other liquid financial assets of £452bn. 

Public sector net financial liabilities were £2,565bn, comprising the net debt plus other financial liabilities of £715bn, less illiquid financial assets of £1,066bn. Public sector negative net worth was £908bn – net financial liabilities of £2,565bn less non-financial assets of £1,657bn.

Revisions

Caution is needed with ONS figures, which are repeatedly revised as estimates are refined, and gaps in the underlying data are filled. This includes local government, where numbers are updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

This month, the ONS revised down the previously reported deficit for the five months to August 2025 by £4bn, including a £2bn error correction for understated VAT receipts. The ONS also increased the reported deficit for the previous financial year (2024/25) by £4bn to £150bn to incorporate estimates of local government actual expenditure.

More significantly, the ONS revised its methodology for calculating economic activity, resulting in an increase in GDP of 1%. Doing so causes historical percentages for deficit and debt as a proportion of GDP to be revised downwards. This includes a 1.1 percentage reduction in public sector net debt/GDP at the start of the financial year on 1 April 2025, from the previously reported 94.8% to the 93.7% shown in Table 2.  

Martin Wheatcroft, external advisor on public finances to ICAEW, said that public finances were broadly as expected, with the £20bn deficit for the month in line with budget.

“Borrowing to fund the deficit was a fraction under £100bn in the six months to September, the second-highest half-year deficit on record after the pandemic year. This was despite a narrowing of the year-to-date budget overrun to £7bn, as a consequence of error corrections and other revisions to previous months. In addition, statistical revisions to the size of the economy resulted in around a percentage point fall in the ratio of public sector net debt to GDP.”

Tepid economic growth and high debt interest costs will continue to weigh on prospects for the rest of the financial year, he added. “The revisions do very little to alter the bleak outlook for the public finances that is driving the need for a significant fiscal correction in the Autumn Budget 2025.”

This article was written by Martin Wheatcroft for ICAEW and was originally published by ICAEW.

Public finances turn ugly just as Chancellor needs good news

Weaker receipts than expected combined with prior month corrections resulted in a £12bn year-to-date budget overrun in the August monthly public finances.

The monthly public sector finances release for August 2025 published by the Office for National Statistics (ONS) on 19 September reported a provisional shortfall between receipts and total public spending of £18bn in August 2025 and £84bn for the five months then ended. These were £6bn and £12bn over budget respectively and £4bn and £16bn higher than in the same periods in 2024.

Martin Wheatcroft, external adviser on public finances to ICAEW, says: “This month’s public finance numbers took a turn for the worse as not only did weaker than expected receipts drive a £6bn budget overrun in August, but revisions to prior months added a further £6bn to the deficit to turn a broadly neutral position a month ago into a £12bn year-to-date budget overrun for the first five months of the 2025/26 financial year.

“These numbers are far from helpful to a Chancellor in desperate need of some good financial news, adding to the prospect of even higher tax rises in the Autumn Budget 2025 than previously feared.”

Month of August 2025

Receipts of £93bn in August 2025 were £5bn or 5% higher than the same month last year, while total public spending was £111bn, £8bn or 8% more than in August 2024. The latter can be analysed between current spending including depreciation of £107bn, slightly below the £108bn monthly average in the first four months of the financial year, and net investment of £4bn, in line with the monthly average incurred between April and July 2025.

Excluding net investment, the current budget deficit for the month of £14bn represented a £4bn deterioration over the current budget deficit of £10bn in the same month last year, highlighting how receipts have failed to keep pace with increases in current spending.

The overall £18bn fiscal deficit for the month was £6bn over budget and £4bn more than in August 2024.

Five months to August 2025

Table 1 highlights how year-to-date receipts of £477bn were up 6% on last year’s equivalents. This included income tax receipts, up 8% from a combination of inflation and fiscal drag from frozen tax allowances, and national insurance receipts, up 18% as a consequence of the increase in employer national insurance from April 2025. VAT receipts were flat year-on-year, in effect a 3% to 4% fall after taking account of consumer price inflation, highlighting the weak economic conditions facing the UK.

Meanwhile, the 8% increase over last year in current spending including depreciation to £539bn in the first five months to August 2025 has principally been driven by public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

This included a £7bn or 12% increase in debt interest to £64bn, which comprised a £6bn increase in indexation on inflation-linked debt as inflation resurged and a £1bn increase in interest on variable and fixed-interest debt. The latter reflects a higher level of debt compared with a year ago being partially offset by a lower Bank of England base rate.

The resulting current budget deficit of £62bn to August 2025 was 29% higher than the £48bn for the same five months last year, a major concern given that the government’s plan was to reduce the cumulative current budget deficit to £47bn at this point.

Net investment of £22bn in the first five months of 2025/26 was £2bn or 10% higher than the same period last year with capital expenditure of £39bn up by £3bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £13bn up by £1bn, offset by depreciation of £30bn up by £2bn.

The overall provisional deficit for the five months to August 2025 of £84bn is £16bn or 24% more than in the same five months last year and £12bn higher than budget. The latter can be analysed as a £15bn budget overrun on current receipts less current spending for the year-to-date, less a £3bn saving on net investment.

Table 1: Summary receipts and spending

5 months to Aug2025/26
£bn		2024/25
£bn		Change
%
Income tax122113+8%
VAT8484–
National insurance8068+18%
Corporation tax4340+7%
Other taxes9693+3%
Other receipts5251+2%
Current receipts477449+6%
    
Public services(301)(276)+9%
Welfare(129)(122)+6%
Subsidies(15)(14)+7%
Debt interest(64)(57)+12%
Depreciation(30)(28)+7%
Current spending(539)(497)+8%
Current deficit(62)(48)+29%
Net investment(22)(20)+10%
Deficit(84)(68)+24%

Borrowing and debt

Table 2 summarises how the government borrowed £99bn in the first five months of the financial year to take public sector net debt to a provisional £2,909bn on 31 August 2025. This comprised £84bn in public sector net borrowing (PSNB) to fund the deficit and a further £15bn to fund government lending and working capital requirements.

The table also illustrates how the debt to GDP ratio increased by 1.6 percentage points from 94.8% of GDP at the start of the financial year to 96.4% on 31 August 2025, with incremental borrowing of £99bn, equivalent to 3.3% of GDP, being partly offset by 1.7 percentage points from the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

Table 2: Public sector net debt and net debt/GDP

5 months to Aug2025/26
£bn		2024/25
£bn
PSNB8468
Other borrowing157
Net change9975
Opening net debt2,8102,686
Closing net debt2,9092,761
   
PSNB/GDP2.8%2.4%
Other/GDP0.5%0.2%
Inflating away(1.7%)(2.3%)
Net change1.6%0.3%
Opening net debt/GDP94.8%95.6%
Closing net debt/GDP96.4%95.9%

Public sector net debt on 31 August 2025 of £2,909bn comprised gross debt of £3,339bn less cash and other liquid financial assets of £430bn. 

Public sector net financial liabilities were £2,550bn, comprising net debt of £2,909bn plus other financial liabilities of £715bn less illiquid financial assets of £1,074bn. 

Public sector negative net worth was £893bn, being net financial liabilities of £2,550bn less non-financial assets of £1,657bn.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government, where the numbers are only updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

This month was no different, with the ONS revising the previously reported deficit for the four months to July 2025 up by £6bn, as well as updating prior year numbers for the annual results of the Bank of England and several other public bodies as well as other typical annual updates such as revised student loan calculations. 

More significantly, the ONS revised reported deficits back to 1998 for methodology and classification changes and back to 2011 for local government outturn numbers that had not previously been incorporated. The reported deficits for 2020/21 and 2021/22 were decreased by £3bn and £2bn to £311bn and £120bn respectively, 2022/23 remained unchanged at £127bn, 2023/24 was increased by £2bn to £134bn, and 2024/25 was reduced by £2bn to £146bn.

This article was written by Martin Wheatcroft for ICAEW and was originally published by ICAEW.

ICAEW chart of the week: Employment costs

My chart for ICAEW this week looks at how employment costs in June 2025 have risen by 4.8% compared with the same month last year, adding to the expense of doing business in the UK.

ICAEW chart of the week on employment costs. A step chart showing the changes between the UK monthly payroll in June 2024 and June 2025. June 2024: £96,975m UK total gross salaries + £8,848m UK total employer national insurance. Step 1: -£520m from 0.5% fewer employees. Step 2: +£3,985m from 3.6% increase in salaries. Step 3: +£1,666m from 17.9% higher employer national insurance. Net change: +£5,131m. June 2025: £100,000m UK total gross salaries + £10,954m UK total employer national insurance. 12 Sep 2025. Chart by Martin Wheatcroft FCA. Sources: ONS, 'PAYE real time information, non-seasonally adjusted'; HMRC, 'Monthly tax receipts'.

According to the Office for National Statistics (ONS) and His Majesty’s Revenue and Customs (HMRC), UK employers paid a total of £111bn in gross salaries and employer national insurance in June 2025, an increase of £5.1bn or 4.8% over the same month a year ago.

My chart this week starts with the payroll in June 2024 of £105,823, comprising gross salaries paid by employers of £96,975m and employer national insurance of £8,848m, although it excludes employer pension contributions.

This monthly cost was reduced by £520m from a reduction in the national workforce, which saw the number of payrolled employees drop by 149,937 or 0.5% from 30,532,600 in June 2024 to 30,382,663 in June 2025. This arose from 7,296,859 leavers exceeding 7,146,922 joiners, most of which are people moving jobs. The reduction in the number of payrolled employees at a time of still-rising overall population numbers highlights the difficult economic situation currently facing the UK. The reduction comprised £476m in less pay and £44m in less employer national insurance (calculated at last year’s rates)

Salary increases since last year of approximately 3.6% added £3,985m or 3.8% to the cost of employment, with mean salaries increasing from £3,176 in the month of June 2024 to £3,291 in the month of June 2025. This comprised an increase of £3,501m or 3.6% in gross salaries and an estimated increase in employer national insurance of £484m or 5.5% (based on last year’s rates).

The median monthly salary increased from £2,389 in June 2024 to £2,530 in June 2025, which is a 5.9% increase compared with a year previously. This was less than monthly pay at the 25th percentile, which increased by 7.8% from £1,408 to £1,518, which was partly driven by a 6.7% increase in the minimum wage implemented in April 2025 (16.3% for those aged 18 to 20 and 18% for those aged under 18) that help lift the salaries of lower paid workers.

Pay at the 75th percentile increased by 4.7% (from £3,632 to £3,803) compared with a year previously, while pay at the 95th and 99th percentiles increased by 3.1% (from £7,461 to £7,692) and 2.6% (from £15,181 to £15,583) respectively. These lower rates of increase for higher paid workers primarily relate to base pay and so do not tell the full story as bonuses and other variable compensation for 2025 will in most cases not show up in pay packets until early next year.

A further £1,666m or 1.5% was added to the total cost of employment as a consequence of changes in employer national insurance effective from April 2025. These took the rate payable by employers from 13.8% of salaries over £792 a month to 15.0% of salaries above £417 per month, adding an extra 17.9% to the amount paid in employer national insurance after taking account of changes in the number of payrolled employees and salary increases since last year. Just under half of the increase (£808m) resulted from the change in the main rate of employer national insurance going up from 13.8% to 15.0% on salaries above £792 a month, with the balance (£858m) coming from lowering the threshold at which the 15.0% applies to £417 per month.

The overall effect was a net increase of £5,131m or 4.8% in total pay and employer national insurance to £110,954m in June 2025, comprising a net increase of £3,025m or 3.1% in total gross salaries to £100,000m and a net increase of £2,106m or 23.8% in employer national insurance to £10,954m.

The chart does not reflect the full cost of employment as it does not include employer pension contributions, non-payrolled benefits, and employment-related costs such as facilities, equipment, training and travel amongst others. However, it still gives a useful illustration of how payroll costs have changed significantly over the course of one year.

ICAEW’s growth campaign identifies how it is too difficult, expensive and uncertain to do business in the UK and calls for the government to do what it can to streamline regulations, reduce unnecessary costs, and provide businesses with the confidence they need to invest.

This chart was originally published by ICAEW.

ICAEW chart of the week: Business growth

Our chart this week asks whether the recent low rate of growth in numbers of businesses registered for PAYE and VAT is linked to the increasing difficulty of doing business in the UK.

ICAEW chart of the week on business growth, showing the net change in the number of PAYE and VAT registered businesses by year. 2017: +13,400 2018: +35,300 2019: +44,300 2020: +13,700 2021: +9,400 2022: -48,000 2023: -26,300 2024: +12,100 H1 2025: +10,000 5 Sep 2025. Chart by Martin Wheatcroft FCA. Source: ONS, 'Business demography: Q2 (Apr to Jun) 2025.

According to the Office for National Statistics, there were net additions of approximately 13,400, 35,300 and 44,300 to the UK inter-departmental business register in 2017, 2018 and 2019 respectively. This was followed by net additions of 13,700 and 9,400 in 2020 and 2021 during the pandemic and then net reductions of 48,000 and 26,300 in 2022 and 2023 during the cost-of-living crisis.

The register started growing again in 2024 with net additions of 12,100, followed by a net increase of approximately 10,000 in the first half of 2025. This rate of increase is significantly lower than the average rate of net business formation before the pandemic but is a significant improvement over the net contraction in the number of businesses in 2022 and 2023 during the cost-of-living crisis.

The net changes are equivalent to 0.5%, 1.3%, 1.6%, 0.5%, 0.3%, -1.7%, -1.0% and 0.4% in the total number of registered businesses in 2017 to 2024 respectively and annualised growth of 0.7% in the first half of 2025.

The total number of PAYE and VAT registered businesses is projected to have reached around 2.75m in June 2025, based on the last published count for March 2024 plus reported movements since then. This is out of an overall total of somewhere in the region of 5.5m businesses in the UK, with the difference mainly due to single-person companies and sole traders that do not employ any staff and operate below the VAT threshold of £90,000 per year.

The approximately 2.75m registered businesses can be analysed into just under 2.1m companies and other types of corporations, approximately 400,000 sole proprietors, 150,000 or so partnerships, and around 100,000 non-profit bodies, mutual associations and public sector organisations. Approximately 945,000 registered businesses are in London and the South East, 675,000 are in the Midlands and the East of England, 535,000 in the North of England, 340,000 in the South West of England and Wales, 175,000 in Scotland, and 80,000 in Northern Ireland.

Business births between 2017 and 2024 were approximately: 338,700; 341,100; 355,700; 322,000; 354,300; 327,500; 307,100; and 310,100; there were 167,600 in the first half of 2025. Business deaths in 2017 to 2024 were: 325,300; 304,800; 311,400; 308,300; 344,900; 375,500; 333,400; and 298,000; with 157,600 in the first half of 2025.

The overall change in the total number of registered businesses between 2017 and the first half of 2025 was 63,900, an average of 7,500 or 0.3% a year over eight and a half years, comprising an annual average of 332,100 business births less 324,600 business deaths in that time.

The chart highlights both the very difficult economic times we have been through in the past few years with the pandemic and cost-of-living crisis and the current period of weak economic growth that has yet to return to pre-pandemic levels.

One of the key ways that we can increase the rate of net business formation is to make it easier to do business in the UK, as discussed in ICAEW’s growth campaign. This asks why it is too difficult, too expensive and too uncertain to do business in the UK today and suggests ways the government can streamline regulation, reduce costs and unnecessary frictions, and provide businesses with greater confidence to invest and grow.

This chart was originally published by ICAEW.

Little comfort for Chancellor as public finances stay in line

Borrowing to fund the deficit in the first four months of the financial year of £60bn was in line with expectations.

The monthly public sector finances release for July 2025 published by the Office for National Statistics (ONS) on 21 August reported a provisional shortfall between receipts and total public spending of £60bn for the four months ended 31 July 2025. This is in line with budget and £7bn more than in the same period last year.

Martin Wheatcroft, External Adviser on Public Finances to ICAEW, says: “This month’s ‘not bad’ result may provide a small amount of relief to a Chancellor under significant pressure.

“The monthly deficit for July was slightly better than expected, while the cumulative result for the first third of the financial year was almost exactly in line with the Office for Budget Responsibility’s prediction at the time of the Spring Statement 2025.

“Unfortunately, this does not change the dismal outlook for the public finances and the rising costs of public services, welfare provision and debt interest that means the Chancellor is again having to work out how she can ask Parliament to authorise higher levels of taxation.”

Month of July 2025

Receipts of £108.8bn in July 2025 were £9.2bn or 9% higher than in July 2024 and also higher than the £92.6bn average for the first three months of the financial year, principally as a result of a boost from income tax self-assessment collections in the month.

Meanwhile, current spending including depreciation of £105.5bn in July was £6.0bn or 6% more than in the same month a year previously. This was slightly lower than the £108.0bn monthly average incurred during April to June 2025.

The result was a current budget surplus for the month of £3.3bn, a £3.2bn improvement over the current budget surplus of £0.1bn in the same month last year.

Net investment of £4.4bn in July 2025 was £0.9bn more than the £3.5bn incurred in July 2024 and slightly higher than the £4.2bn average incurred during the three months to June 2025.

The provisional fiscal deficit for July 2025 was therefore £1.1bn, £1.0bn less than the £2.1bn budget for the month and a £2.3bn improvement over the £3.4bn deficit in July 2024.

Four months to July 2025

Table 1 highlights how year-to-date receipts of £387bn were up 7% on last year’s equivalents, with income tax receipts up 8% from a combination of inflation and fiscal drag from frozen tax allowances, and national insurance receipts up 19% as a consequence of the increase in employer national insurance that was implemented in April 2025.

Meanwhile, the 8% increase over last year in current spending including depreciation to £430bn in the first four months to July 2025 was primarily as a consequence of public sector pay rises, higher supplier costs, and the uprating of welfare benefits.

This included a £6bn or 13% increase in debt interest to £53bn, which comprised a £5bn increase in indexation on inflation-linked debt as inflation resurged and a £1bn increase in interest on variable and fixed-interest debt. The latter was primarily the result of a higher level of debt compared with a year ago partially offset by a lower Bank of England base rate.

The resulting current budget deficit of £43bn to July 2025 was 16% higher than for the same four months last year.

Net investment of £17bn in the first four months of 2025/26 was £1bn or 6% higher than the same period last year. Capital expenditure of £30bn was up by £1bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £11bn were up by £2bn, less depreciation of £24bn that was up by £2bn compared with the same four month period a year prior.

The consequence is a provisional deficit for the first third of the 2025/26 financial year of £60bn, which is £7bn or 13% more than in the same four month period last year. Despite being almost exactly in line with budget (only £0.1bn higher) this is the third-highest April-to-July deficit since monthly records began in 1993 (after 2020/21 and 2021/22 during the pandemic).

Table 1: Summary receipts and spending

4 months to July2025/26
£bn		2024/25
£bn		Change
%
Income tax10093+8%
VAT7067+4%
National insurance6454+19%
Corporation tax3532+9%
Other taxes7674+3%
Other receipts4241+2%
Current receipts387361+7%
    
Public services(239)(221)+8%
Welfare(103)(97)+6%
Subsidies(11)(11)–
Debt interest(53)(47)+13%
Depreciation(24)(22)+9%
Current spending(430)(398)+8%
Current deficit(43)(37)+16%
Net investment(17)(16)+6%
Deficit(60)(53)+13%

Borrowing and debt

Table 2 summarises how the government borrowed £81bn in the first third of the financial year to take public sector net debt to a provisional £2,891bn on 31 July 2025. This comprised £60bn in public sector net borrowing (PSNB) to fund the deficit and £21bn to fund government lending activities and working capital movements.

The table also illustrates how the debt to GDP ratio increased from 94.8% of GDP at the start of the financial year to 96.1% on 31 July 2025, with the incremental borrowing partly offset by the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

Table 2: Public sector net debt and net debt/GDP

4 months to July2025/26
£bn		2024/25
£bn
PSNB6053
Other borrowing21(1)
Net change8152
Opening net debt2,8102,686
Closing net debt2,8912,738
   
PSNB/GDP2.1%1.9%
Other/GDP0.7%–
Inflating away(1.5%)(1.9%)
Net change1.3%–
Opening net debt/GDP94.8%95.6%
Closing net debt/GDP96.1%95.6%

Public sector net debt on 31 July 2025 of £2,891bn comprised gross debt of £3,309bn less cash and other liquid financial assets of £418bn.

Public sector net financial liabilities were £2,525bn, comprising net debt of £2,891bn plus other financial liabilities of £707bn less illiquid financial assets of £1,073bn. Public sector negative net worth was £899bn, being net financial liabilities of £2,525bn less non-financial assets of £1,626bn.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government, where the numbers are only updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

The latest release saw the ONS revise the previously reported deficit for the three months to June 2025 up by £1bn. The ONS also revised up its estimate of GDP in the first quarter of the financial year, resulting in a 0.4 reduction in the opening debt to GDP ratio on 1 April 2025 from 95.2% to 94.8% and the debt to GDP ratio for 30 June 2025 from 96.2% to 95.8%.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and was originally published by ICAEW.

ICAEW chart of the week: One Big Beautiful Bill Act 2025

My chart for ICAEW this week looks at the impact on the US federal government deficit of the major tax and spending changes passed by Congress and signed into law by President Trump on 4 July 2025.

ICAEW chart of the week: A step chart showing the projected effect of the One Big Beautiful Bill Act 2025 on the average annual US federal government deficit between FY2025 and FY2034. Left hand column: Baseline projection $2,109bn. Steps 1 to 3 (shaded): Spending cuts -$110bn plus Tax cuts +$449bn plus Extra interest +$68bn. Step 4: Net change +$407bn (total of steps 1 to 3). Right hand column: Revised projection $2,516bn. 25 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: Congressional Budget Office; ICAEW calculations.

My chart this week looks at the impact on the US federal government deficit of the major tax and spending changes passed by Congress and signed into law by President Trump on 4 July 2025. 

The Congressional Budget Office (CBO) published on 21 July 2025 its assessment of Public Law 119-21 (the 21st law passed by Congress in its 119th session), also known as the One Big Beautiful Bill Act 2025 (OBBBA).

OBBBA was passed by Congress and signed into law by President Trump on 4 July 2025 and contains sweeping changes to the US federal tax system as well as a significant shift in spending priorities.

The chart this week attempts to illustrate the impact of OBBBA on the federal deficit by looking at how it changes the average annual projected deficit over the next 10 years from FY2025 (the current fiscal year ending on 30 September 2025) to FY2034, compared with the CBO’s baseline projection.

The baseline projection, published by the CBO in January 2025, was for the federal government deficit to increase from $1,865bn in FY2025 to $2,597bn in FY2034, an average deficit over the 10 years of $2,109bn or 5.8% of GDP.

According to the CBO, OBBBA is expected to increase the federal deficit each year by $339bn on average over the period to FY2034, with a net cut in federal spending of $110bn on average offsetting a net cut in revenues of $449bn. The CBO’s assessment does not take account of the additional cost of financing these higher deficits, which ICAEW calculates would add a further $68bn a year on average to the interest bill. 

The consequence is a net increase in the annual federal deficit of $407bn on average over 10 years, taking it to an average of $2,516bn or 7.0% of GDP.

Net spending cuts of $110bn comprise spending increases of $66bn a year on average, net of spending reductions of $164bn a year and incremental ancillary income that is deducted from spending of $12bn. Extra spending includes an extension of child tax benefits ($19bn a year on average) and more money for homeland security and immigration enforcement ($18bn), the military and coastguard ($17bn), farm subsidies ($5bn), air traffic control ($1bn), the mission to Mars ($1bn) and other items ($5bn). 

Spending reductions include cuts in Medicaid and Medicare programmes ($106bn on average each year), education and student loan relief ($30bn), other welfare and health programmes ($19bn), clean energy subsidies ($8bn) and other cuts ($1bn), while ancillary income comprises $9bn on average from spectrum auctions, $2bn from oil and gas leases, and $1bn extra from higher visa fees.

Net tax cuts comprise $511bn a year in tax cuts less $62bn a year in tax increases.

Tax cuts include making previous temporary tax cuts permanent ($379bn), business tax reforms ($97bn), personal tax reforms ($26bn), energy related tax credits ($4bn), Medicaid and Medicare related tax deductions ($3bn), and other ($2bn). Tax increases include the termination of tax reliefs for clean energy ($47bn a year), addressing tax loopholes ($6bn), additional immigration fees included in revenue ($4bn), taxing low-value international shipments ($4bn) and other ($1bn).

The CBO doesn’t directly conclude what this will mean for the US national debt (debt held by the public), which was expected in January’s baseline projection to increase from $28.2tn or 98% of GDP at the start of the current financial year to $49.5tn or 117% of GDP on 30 September 2034. Adding $4.1tn over 10 years to that amount suggests this would increase to $53.6bn or 127% of GDP.

These numbers don’t take account of the anticipated economic boost of lower taxes that should partially offset some of the tax impacts set out in the CBO’s analysis, as well as increasing the denominator in the deficit to GDP ratio. However, they also don’t take account of other factors such as US trade policy – including the additional tax receipts from tariffs and the potential effect that those higher taxes will have on the US economy – or many other policies of the US administration. We will need to wait for the CBO’s next full economic and fiscal projections later in the year to understand more about what that might mean.

Either way, the OBBBA will go down as one of the most consequential legislative acts of the US Congress in recent years.

This chart was originally published by ICAEW.

First quarter fiscal deficit in line as Chancellor ponders tax rises

Despite borrowing to fund the deficit in the first three months of the financial year of £58bn being in line with expectations, it was still the third-highest first quarter result on record.

The monthly public sector finances release for June 2025 published by the Office for National Statistics (ONS) on 22 July reported a provisional deficit of £21bn for the month of June and £58bn for the three months then ended. This is £4bn more and in line with budget respectively, and £7bn and £8bn more in each case than the first fiscal quarter a year ago.

Alison Ring OBE FCA CPFA, ICAEW Director of Public Sector and Taxation, says: “Even if borrowing to fund the deficit in the month of June was only a little higher than expected and was in line with expectations in the first three months of the financial year, the first quarter was still the third highest since monthly records began. This trajectory will not have lightened the Chancellor’s mood as she decides which taxes to put up in the Autumn Budget later this year. 

“The government has two big problems with the public finances: the short-term outlook – which is bad – and their long-term prospects – which are worse. Public spending continues to outpace tax receipts by a significant margin, while the OBR has reiterated its conclusion that the public finances are unsustainable over the next 25 to 50 years if this and future governments continue on the current path. 

“Unfortunately, the major challenges facing the public finances over the next quarter of a century and beyond means that this will not be the last time a chancellor of the exchequer needs to come back asking for more. Now is the time to stop kicking the can down the road and develop a comprehensive long-term fiscal strategy to put the public finances onto a sustainable path.”

Month of June 2025

The fiscal deficit for June 2025 was £21bn, £4bn more than budgeted and £7bn more than a year previously. According to the ONS, this was the second-highest June deficit since monthly records began in 1993, with only June 2020 during the pandemic being higher.

First quarter to June 2025

The deficit for the first three months of the 2025/26 financial year was £58bn, £8bn more than a year previously. Despite being in line with budget, this is the third-highest first quarter deficit since monthly records began (after the first quarter deficits in 2020/21 and 2021/22). 

Table 1 highlights how total receipts and total current spending in the three months to June 2025 of £278bn and £323bn were up 7% and 8% respectively, compared with the same period last year.

Receipts were boosted by the employer national insurance increase from April 2025 onwards in addition to the effect of fiscal drag on income tax caused by the continued freeze in personal tax allowances. Meanwhile, the increase in current spending over the past year was primarily as a consequence of public sector pay rises, higher supplier costs and rises in welfare benefits.

The increase in debt interest of £5bn to £42bn consisted of a £6bn increase in indexation on inflation-linked debt as inflation returned less a £1bn reduction in interest on variable and fixed-interest debt. The latter was primarily the effect of a lower Bank of England base rate offsetting a higher level of debt compared with a year ago.

Net investment of £13bn in the first quarter of 2025/26 was £1bn or 8% higher than the same period last year. Capital expenditure of £22bn was up by £1bn and capital transfers (capital grants, research and development funding, and student loan write-offs) of £9bn were up by £1bn, less depreciation of £18bn up by £1bn.

Table 1: Summary receipts and spending

3 months to June2025/26
£bn		2024/25
£bn		Change
%
Income tax6460+7%
VAT5250+4%
National insurance4841+17%
Corporation tax2624+8%
Other taxes5756+2%
Other receipts3130+3%
Current receipts278261+7%
Public services(178)(165)+8%
Welfare(77)(72)+7%
Subsidies(8)(8)–
Debt interest(42)(37)+14%
Depreciation(18)(17)+6%
Current spending(323)(299)+8%
Current deficit(45)(38)+18%
Net investment(13)(12)+8%
Deficit(58)(50)+16%

Borrowing and debt

Table 2 summarises how the government borrowed £64bn in the first quarter to take public sector net debt to £2,874bn on 30 June 2025. The movements comprised £58bn in public sector net borrowing (PSNB) to fund the deficit and £6bn to fund government lending activities and working capital movements.

The table also illustrates how the debt to GDP ratio increased from 95.2% of GDP at the start of the financial year to 96.3% on 30 June 2025, with the incremental borrowing partly offset by the ‘inflating away’ effect of inflation and economic growth adding to GDP, the denominator in the net debt to GDP ratio.

Table 2: Public sector net debt and net debt/GDP

3 months to June2025/26
£bn		2024/25
£bn
PSNB5850
Other borrowing6(3)
Net change6447
Opening net debt2,8102,686
Closing net debt2,8742,733
PSNB/GDP2.0%1.8%
Other/GDP0.2%(0.1%)
Inflating away(1.1%)(1.5%)
Net change1.1%0.2%
Opening net debt/GDP95.2%95.6%
Closing net debt/GDP96.3%95.8%

Public sector net debt on 30 June 2025 of £2,874bn comprised gross debt of £3,286bn less cash and other liquid financial assets of £412bn. 

Public sector net financial liabilities were £2,504bn, comprising net debt of £2,874bn plus other financial liabilities of £706bn less illiquid financial assets of £1,076bn. Public sector negative net worth was £878bn, being net financial liabilities of £2,504bn less non-financial assets of £1,626bn.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are repeatedly revised as estimates are refined and gaps in the underlying data are filled. This includes local government where the numbers are only updated in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

The latest release saw the ONS revise the previously reported deficit for the two months to May 2025 down by £1bn and revise public sector net debt on 31 May 2025 up by £7bn.

For further information, read the public sector finances release for June 2025.

This article was originally published by ICAEW.

ICAEW chart of the week: climate change and the public finances

My chart for ICAEW this week looks at how climate change is now expected to make the OBR’s dire predictions for the public finances even worse.

A line chart on climate change and the public finances, with three curved lines for public sector net as a share of GDP over fifty years. with labels from March 2034 onwards. Bottom line: Baseline public sector net debt/GDP. Falls from just under 100% of GDP to 90% of GDP in March 2034 and then rises to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively. Middle line: Baseline + climate change (below 3°C scenario). Rises from 94% of GDP in March 2034 (label not shown) to 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively. Top line: Baseline + climate change + economic shocks. Rises from 104% in March 2034 to 134%, 187%, 275% and then 398% in March 2074. 18 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: OBR, 'Fiscal risks and sustainability', Sep 2024 and Jul 2025 reports.

ICAEW’s chart of the week is on climate change this week, illustrating how it could add a further 74 percentage points to the Office for Budget Responsibility (OBR)’s already disheartening baseline projection for public sector net debt of 274% of GDP to reach 348% of GDP, or potentially 398% if economic shocks are included.

The baseline projection, published by the OBR in September 2024, showed public sector net debt as a proportion of the size of the economy falling from just under 100% of GDP to 90% of GDP in March 2034 and then rising to 100%, 130%, 188% and 274% of GDP in March 2044, 2054, 2064 and 2074 respectively. 

One of the main drivers of the baseline projection is the expected rise in spending on pensions, health and social care as more people live longer, sometimes less healthy lives, combined with a falling fertility rate that means there will be proportionately fewer working age adults to pay the taxes needed to fund that rise.

Incorporating the OBR’s new central projection for climate change, public sector net debt would be 94% of GDP in March 2034 (not shown in the chart because of a lack of space between lines) and then 114%, 157%, 235% and 348% of GDP in March 2044, 2054, 2064 and 2074 respectively. Adding potential economic shocks on top would increase the projection for public sector net debt/GDP to 104% in March 2034 rising to 134%, 187%, 275% and then 398% in March 2074.

The September 2024 baseline projection included the loss of fuel duty receipts from the phasing out of petrol and diesel vehicles between now and 2050, but the OBR in its recent July 2025 fiscal and sustainability report has looked in more detail at both the incremental costs of transitioning to net zero and the damage that is likely to result from a much warmer and wetter climate in several different scenarios.

OBR’s central ‘below 3°C’ scenario is based on global average temperatures rising by 2.9°C above pre-industrial levels by 2100, of which weather and other damage associated with a much warmer and wetter climate is projected to add 17 percentage points to accumulated debt over the next half century from direct and indirect costs and revenue losses. Climate damage is also expected to result in slower economic growth that would add 27 percentage points over 50 years by reducing the denominator in the debt to GDP ratio. The government’s share of transition costs (including lower tax receipts from higher private sector spending) is projected to add 7 percentage points, while there is a 22 percentage point impact from the incremental debt interest that would be incurred on a higher level of debt.

This is before taking account of recessions and other potential economic shocks, which based on historical patterns are expected to add 10% of GDP to public sector net debt every decade or so.

The chart does not reflect other risks identified by the OBR in its latest report, where it reports that the exposures to the public finances have increased since its assessment last year. One risk they did look at in some detail is the prospect of higher interest rates on government borrowing on the basis that demand for gilts reduces as the Bank of England winds down its holdings of gilts (quantitative tightening) and defined benefit pension schemes gradually sell their holdings of gilts to fund pension payments. This risk might be mitigated by selling shorter-dated gilts, although shorter maturities would make the public finances less resilient by increasing the amount of debt needing to be refinanced each year.

The OBR’s dismal assessment of the prospects for the public finances highlights just how difficult a financial position the UK finds itself in, with a lot to do (and some luck needed) if it is to be restored to a sustainable path. At the same time, the costs of climate change are now becoming that much more apparent as extreme weather events and other climate-related costs start to show up in public finance and insurance data.

For more information about the role of the accountancy profession in climate change, visit ICAEW’s climate hub.

This chart was originally published by ICAEW.

ICAEW chart of the week: Balance of payments

Our chart this week takes a look at the UK’s balance of payments in the year to 31 March 2025 and wonders what the future has in store.

A step chart on the balance of payments in 2024/25 showing payments and receipts on either side, with three shaded sub-steps in-between adding up to the current account deficit, being the difference between total payments and receipts. Payments £1,401bn = £924bn for imports + £430bn earnings + £47bn transfers. Receipts £1,318bn = £880bn from exports + £407bn earnings + £31bn transfers. Step 1: Trade deficit (imports and exports) -£44bn. Step 2: Primary income deficit (earnings) -£23bn. Step 3: Secondary income deficit (transfers) -£16bn. Step 4: Current account deficit (sum of steps 1 to 3) -£83bn. 11 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Balance of payments, UK: Jan-Mar 2025', seasonally adjusted, four quarters to Mar 2025.

The UK is a trading nation as demonstrated by its balance of payments, the topic of our chart this week.

According to the Office for National Statistics (ONS), the UK made external payments of £1,401bn in 2024/25, comprising £924bn in exchange for imported goods and services, £430bn in investment and other earnings paid to foreign investors and workers, and £47bn in remittances, international development aid and other transfers.

On the other side of the ledger, the UK received £1,318bn from external sources in 2024/25 comprising £880bn in exchange for exported goods and services, £407bn from foreign investment and other earnings, and £31bn in remittances and other transfers.

As our chart illustrates, this resulted in a current account deficit of £83bn in 2024/25, comprising a trade deficit of £44bn, a primary income deficit on earnings of £23bn, and a secondary income deficit on transfers of £16bn.

The trade deficit of £44bn can be analysed between a deficit on goods of £239bn (being payments for goods imports of £602bn net of receipts from goods exports of £363bn) and a surplus on services of £195bn (with payments for services imports of £322bn being exceeded by receipts from services exports of £517bn).

The primary income deficit of £23bn principally relates to the £22bn difference between £427bn in investment income and profits generated in the UK paid to foreign owners in 2024/25 and the £407bn received by UK investors from their investments overseas, plus £1bn from the net of £3bn paid in compensation to foreign workers less £2bn earnt by UK workers from foreign sources.

The secondary income deficit of £16bn comprises a net £10bn in government-related transfers, being £11bn in payments made by the UK government (primarily for international development and humanitarian aid) less £1bn received from the EU and others, and a net £6bn from the differences between remittances and other transfers sent abroad of £36bn less remittances and other transfers received into the UK of £30bn.

The chart does not show the other side of the balance of payments, which is a £77bn non-seasonally adjusted surplus on the investment account less a £4bn deficit on the seasonally adjusted capital account, a net cash inflow of approximately £73bn. 

The £77bn surplus on the investment account reflected net investment into the UK of £370bn over the course of the four quarters to March 2025, less £293bn net investment abroad. The £4bn deficit on the capital account primarily relates to international development capital grants, with £1bn from the disposal of non-financial assets to foreign owners offset by £1bn in UK purchases of foreign non-financial assets.

While some of the difference of £10bn between the current account deficit of £83bn and the net surplus on the investment and capital accounts of £73bn is because of timing differences from seasonal adjustments, most of it arises because the ONS is not able to gather data on all international payments and receipts. In theory the balance of payments should balance exactly.

The current account deficit of £83bn in 2024/25 was equivalent to 2.9% of the UK’s GDP of £2,891bn for the same period, being the net of total payments and total receipts of 48.5% and 46.6% of GDP respectively.

Being the difference between two very big numbers, the current account deficit is the net effect of billions of transactions every year as goods and services are bought and sold internationally, earnings are paid and received, and money is transferred at exchange rates that change on a minute-by-minute basis. Despite this the current account deficit in 2024/25 was only 0.1 percentage points higher than the average 2.8% of GDP since 1997, even if it has gone as high as 6.9% in an individual quarter.

While the global trade war was initiated by the US is likely to have a major impact on how money flows around the world, it is much harder to guess how significant that effect will be, either on the overall global economy or on any individual country, in particular the UK. 

Either way, the balance of payments is likely to become a more prominent statistic in the coming months and years. 

This chart was originally published by ICAEW.

ICAEW chart of the week: Energy price cap

My chart for ICAEW this week looks at the domestic energy price cap since its peak in the first quarter of 2023.

Column chart on the energy price cap by quarter since 2023. There is a vertical line between 2023 Q4 and 2024 Q1 to show the point when typical energy usage changed. Price cap 2023 Q1 £4,279, Q2 £3,280, Q3 £2,074 and Q4 £1,923; 2024 Q1 £1,928, Q2 £1,690, Q3 £1,568 and Q4 £1,179; 2025 Q1 £1,738, Q2 £1,849, Q3 £1,720 and Q4 £1,698 (pale colours as a forecast). Bars show annual standing charges and per kWh electricity and gas prices for each quarter as set out in the accompanying article. 4 Jul 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: Ofgem, Cornwall Insight. Typical electricity and gas usage 2,900kWh and 12,000KWh to 2023 Q4 and 2,700kWh and 11,500kWh from 2024 Q1.

According to Ofgem, the domestic energy price cap in Great Britain for the third quarter of 2025 commencing on 1 July is £1,720 per year. This is a 7% reduction from the £1,849 per year price cap in the previous quarter, based on typical energy usage of 2,700kWh of electricity per year and 11,500kWh of gas per year.

The above statement may be confusing because the amounts quoted are not what is capped and the price cap only lasts for a quarter rather than a year. 

There is, however, a method to Ofgem’s madness. There are actually 252 price caps set by Ofgem each quarter that it distils into one headline number, being the average of fourteen regional prices for a dual-fuel standard credit user multiplied by typical annual usage plus the 5% VAT that is payable on domestic energy supplies. 

This single annualised number makes it much easier to communicate what is happening to energy prices and also avoids getting into the complications of seasonal variations in energy usage during the course of each year.

The 252 price caps comprise two caps – a maximum per kWh price and a maximum daily standard charge – for each of three different types of users (single-rate users of electricity, multi-rate ‘Economy 7’ users of electricity and users of gas), multiplied by three different categories of customers (standard credit, direct debit and prepayment meters), and then multiplied by 14 regional variations

The headline price cap is not the maximum that households will pay in a year, nor should you divide by four to guess at the amount payable for that individual quarter. Those paying by direct debit or using prepayment meters (since July 2023, previously prepayment customers paid more) are capped at 7% and 10% on average less than standard credit users based on typical usage, while maximum prices and standing charges also vary by region. Larger homes are likely to use much more energy and so pay a lot more, while smaller homes are likely to pay less. 

Meanwhile, energy suppliers have started to offer annual or longer fixed-rate deals again, typically at a discount to the current maximum prices but with the price protection that such deals offer offset by the risk that the fixed-rate in the deal could exceed the price cap in subsequent quarters if prices go down.

As my chart this week illustrates, the annual price cap peaked at £4,279 in the first quarter of 2023, based on average maximum standing charges of £272 per year for both electricity and gas meters, plus 2,900kWh of electricity at 67.47p and 12,000kWh of gas at 17.08p. The price cap fell to £3,280 in the second quarter (£300 standing charges, 50.60p/kWh for electricity and 12.61p/kWh for gas), £2,074 in the third quarter (£300, 30.11p/kWh and 7.51p/kWh) and £1,923 in the fourth quarter of 2023 (£303, 27.35p/kWh and 6.89p/kWh).

Ofgem changed its estimate of typical annual usage to 2,700kWh in electricity and 11,500kWh in gas from the first quarter of 2024, so the £1,928 headline price cap was actually a 3% increase compared with the previous quarter once the change is adjusted for. The price cap fell to £1,690 in the second quarter (£333 standing charges, 24.50p/kWh for electricity and 6.04p/kWh for gas) and £1,568 in the third quarter (£334, 22.36p/kWh and 5.48p/kWh) before rising to £1,179 in the fourth quarter of 2024 (£339, 24.50p/kWh and 6.24p/kWh).

Prices rose in the first quarter of 2025 to £1,738 (£338 standing charges, 24.86p/kWh for electricity and 6.34p/kWh for gas) and £1,849 in the second quarter (£315, 27.03p and 6.99p) before falling to £1,720 in the current quarter that commenced on 1 July and ends on 30 September 2025 (£297, 25.73p/kWh and 6.33p/kWh).

Cornwall Insight projects that the price cap could fall slightly to £1,698 in the fourth quarter (£299 standing charges, 26.17p/kWh and 6.02p/kWh) based on data up to 29 June 2025. However, this could easily change depending on what happens to wholesale prices over the next month and a half before Ofgem sets the next quarterly price cap on 27 August 2025.

Despite the significant fall in energy prices from their peak in the first quarter of 2023, the cap continues to be much higher than it was before the pandemic and the cost-of living crisis. After adjusting for consumer price inflation and changes in estimated typical usage, the £1,720 per year price cap in the current quarter is approximately 26% higher than the original price cap of £1,137 in the first quarter of 2019 (not shown in the chart, based on £177 a year in standing charges, 16.52p/kWh x 3,100kWh typical annual usage of electricity and 3.73p/kWh x 12,000kWh of gas).

While it is positive that energy prices appear to have stabilised at around the current level over the past couple of years, there continue to be significant geopolitical risks that mean that prices could rise significantly in some specific scenarios.

Time to keep our fingers crossed and hope those risks don’t materialise

This chart was originally published by ICAEW.