Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.

Public sector net borrowing reached £14.3 billion in February, marking a sharp turnaround from the exceptional £30 billion surplus recorded in January.

February’s return to borrowing underlines the more challenging reality facing the UK’s public finances. The January surplus was largely seasonal and driven by the annual spike in tax revenues. When those temporary factors fade, the structural pressures on government finances quickly re-emerge.

Borrowing is expected to be substantial across 2026. Weak economic growth has limited the expansion of the tax base, while spending pressures remain significant across areas such as healthcare, social support and debt interest payments. Slower economic activity reduces receipts from income tax, corporation tax and VAT, making it more difficult for the government to narrow the fiscal deficit.

After a promising six months where the financial markets calmed, UK bond yields have shot up in the last month, increasing the cost of servicing government debt. This is not the Chancellor’s fault, instead being shaped by developments beyond the UK’s borders. Escalating tensions in the Middle East have already pushed energy prices higher in global trading markets and fed into inflation forecasts. Higher inflation raises the cost of servicing the UK’s large stock of inflation-linked government debt and can also increase public spending on benefits and pensions. None of these are things that financial markets like.

However, the narrow fiscal headroom manufactured by the Chancellor is of her own doing — and this leaves the economy vulnerable to external shocks. Without economic growth to increase tax revenues and grow this buffer, we are likely to see the UK’s debt-to-GDP ratio continue to rise.

Growth in the UK economy has already been downgraded for 2026. The key question now is whether the UK economy can regain stronger growth before global instability pushes government borrowing even higher.

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