UK Budget Deficit Narrows? Not This Month—But There Is Nuance in the Numbers

Executive summary

Headlines suggesting a narrower UK budget deficit don’t match the latest official outturn. The ONS reports that public sector net borrowing (PSNB ex) was £18.0bn in August 2025, £3.5bn more than August 2024 and above the OBR’s March profile (£12.5bn). Year-to-date borrowing (Apr–Aug) reached £83.8bn, £16.2bn higher than a year ago. Net debt (ex-banks) stood at 96.4% of GDP. The top-line therefore points to less fiscal headroom, not more. That said, several under-the-hood items—lower APF transfer payments vs last year, rising receipts, and a smaller central-government cash need—offer pockets of resilience that could support targeted policy if growth weakens. Gilt yields and sterling remain sensitive to these prints and to pre-Budget signals. (Office for National Statistics)

The August print: what actually changed

• Borrowing (PSNB ex): £18.0bn in Aug 2025 (+£3.5bn y/y; highest August in five years). It also overshot the OBR’s monthly profile by £5.5bn.
• FY-to-date borrowing (Apr–Aug): £83.8bn, £16.2bn above the same period in 2024 and £11.4bn above the OBR’s March forecast profile. (Office for National Statistics)
• Current budget deficit (Aug): £13.6bn; FY-to-date £62.0bn (+£13.8bn y/y). (Office for National Statistics)
• Debt (ex-banks): 96.4% of GDP (provisional), up 0.5pp y/y. (Office for National Statistics)

Drivers of the overshoot:

• Debt interest rose with RPI-linked payments (+£10.6bn ytd vs a year ago), reminding us how inflation and index-linked gilts propagate into the deficit. (Office for National Statistics)
• Departmental spending (goods/services) was +£16.2bn ytd, reflecting pay awards and inflation. Social benefits were +£7.6bn ytd as uprating cascaded through pensions and welfare. (Office for National Statistics)

Where the “headroom” narrative comes from

Even with a wider deficit, three offsets matter for policy calculus:

1. Receipts are growing. Central-government current receipts rose £25.5bn ytd (to £433.0bn), including +£13.4bn in tax receipts (notably Income Tax +£8.9bn, Corporation Tax +£2.7bn) and +£12.1bn in NICs after April changes to employer rates. The tax base hasn’t rolled over. (Office for National Statistics)
2. Lower APF transfers reduce “mechanical” pressures. Central-government net investment fell £13.1bn ytd in part because payments to the Bank of England’s APF were £16.1bn lower than a year ago; those flows net out within the public sector, but the smaller gross call eases optics and cash management. (Office for National Statistics)
3. Cash need improved vs last year. The memo line shows the central-government net cash requirement at £73.2bn ytd, £24.4bn less than the same period last year—helpful for funding dynamics even if accrual borrowing is up. (Office for National Statistics)

Reality check: These cushions don’t negate the fact that borrowing is running hot versus both last year and the OBR path. The OBR said earlier that borrowing had been tracking the March profile up to July; August broke that pattern. The policy conclusion is not “ample headroom,” but rather selective capacity for targeted measures if they’re offset elsewhere or consistent with fiscal rules. (Office for Budget Responsibility)

Market lens: gilts, sterling, and the November Budget

Markets reacted to the surprise August overshoot with higher long-dated yields and a cautious tone around auction demand. The 30-year gilt nudged above 5.5% on the day of the release; 10-year yields hover near 4.7–4.8%. Sterling has been steady but headline-sensitive as investors handicap November 26 Budget choices and fiscal rules. A data-dependent, credibility-first stance from the Treasury keeps borrowing costs anchored; slippage raises the term premium. (Reuters)

What could enable targeted stimulus despite a bigger deficit

If the government seeks to support growth without unnerving gilt markets, the following design principles matter:

• Target productivity, not demand bloat. Outlays tied to planning reform, grid/energy permits, skills, and public-investment bottleneck clearing can lift potential output with smaller near-term inflation impulse—easier to square with BoE disinflation and fiscal rules. (This is an educational framing, not advice.)
• Time-limit and score it. One-off, sunset-dated measures with robust OBR scoring signal discipline and reduce worries about structural drift in the primary balance.
• Reprioritize, don’t just add. Given ytd overshoots, any growth package could be paired with reprioritization (e.g., slower low-multiplier spend) to keep the debt-to-GDP path aligned with the rules.
• Lean on delivery, not cheques. Policies that unblock private investment (permitting, procurement reform) can have outsized effects with limited gross fiscal cost.

Why this can work: Markets care as much about framework credibility as about the level of borrowing. The OBR’s monthly commentary previously noted outturns were close to profile through July; demonstrating that August was a blip—not a trend—would lower the risk premium into Budget day. (Office for Budget Responsibility)

Five charts to watch before Budget day (conceptual guide)

1. Borrowing vs OBR profile (monthly). Another overshoot in September would compress fiscal space; an undershoot would rebuild it. (ONS monthly bulletin vs OBR profile.) (Office for National Statistics)
2. Debt interest sensitivity. RPI moves translate into index-linked gilt costs. A benign RPI patch can quickly trim monthly interest outlays. (Office for National Statistics)
3. Receipts breadth. Income Tax, NICs, VAT, and CT momentum—do receipts keep outperforming wages/nominal GDP? (Office for National Statistics)
4. CGNCR vs PSNB ex. Cash needs (funding) can diverge from accrual borrowing; both matter for gilts and DMO auction dynamics. (Office for National Statistics)
5. Gilt yields & auction cover. Watch bid-to-cover and tail sizes; softer demand raises funding costs and can shrink effective headroom. (Reuters)

Implications (neutral, educational)

• Macro growth: A wider August deficit reflects inflation-linked costs and pay/benefit uprating, not a revenue collapse. Fiscal policy can still be supportive at the margin if narrowly aimed and offset, but the room is tighter than the headline “deficit narrows” claim implies. (Office for National Statistics)
• Markets: Credibility remains the cheapest stimulus. Clear OBR-scored plans that keep debt on a falling forecast path tend to compress risk premia—lowering borrowing costs economy-wide more than scatter-shot giveaways. (Context only.) (Office for Budget Responsibility)
• Households & firms: If fiscal moves focus on supply-side frictions (planning, energy connections, skills), they can ease cost pressures and raise capacity without stoking near-term inflation—a better complement to BoE policy than broad demand rebates.

Bottom line

The latest data do not show a narrower deficit in August. Instead, they show higher borrowing versus last year and the OBR’s profile, with net debt near 96% of GDP. Yet the composition—rising receipts, lower APF outflows, and improved cash needs—means the government still has limited, targeted scope to lean against cyclical weakness if it preserves the credibility of the fiscal framework. That balance—support where it multiplies, restraint where it reassures—is what will determine whether “improved finances” translate into meaningful, market-friendly stimulus. (Office for National Statistics)

Sources (primary/high-quality)

• ONS — Public sector finances, UK: August 2025 (press release, tables, and charts: PSNB ex, debt, current budget, CGNCR; OBR comparison included in release). (Office for National Statistics)
• OBR — Monthly commentary on borrowing in line with forecast (Q1 & July updates) (context for how outturns compared with March 2025 EFO profile before August). (Office for Budget Responsibility)
• Reuters — Market reaction & auction colour; sterling and gilt yields; Trading Economics for quick yield reference. (Reuters)

Editorial standards & financial disclosure

This article is for information and education only and does not constitute investment, legal, or tax advice. We do not provide buy/sell/hold recommendations. Figures are from the ONS/OBR and reputable outlets as cited; monthly public-finance data are seasonally adjusted where noted and subject to revision. Always consult original releases before acting. No compensation received from any company or issuer mentioned.