UK economists warns borrowing could reach £129bn in 2026/27, with higher debt-interest costs threatening to more than halve fiscal headroom.
Pound Sterling exchange rates held steady on Tuesday despite a larger-than-expected UK borrowing figure, with Pantheon Macroeconomics warning that spending pressures will complicate the October Budget.
The Pound to Dollar exchange rate (GBP/USD) stood at 1.3372, while the Pound to Euro exchange rate (GBP/EUR) traded near 1.1665.
Both were up 0.03% from Monday’s close, although Sterling remained 1.30% lower against the Dollar this month.
August borrowing reached £18.3bn, exceeding the £15.5bn consensus and the Office for Budget Responsibility’s £14.8bn forecast.
Borrowing across April to August totalled £77.3bn, £2.2bn below the previous year but £8.1bn above the OBR’s projected path.
Pantheon warns that maintaining that overshoot would leave a substantial gap in the full-year figures:
“All told, we estimate that borrowing will hit £129B in 2026/27, above the OBR’s forecast of £115B, if the overshoots so far this fiscal year are maintained until March 2027.”
Spending outweighs the improvement in revenues
Spending is £7.4bn above forecast so far this financial year, but revenues offer some relief.
Pantheon notes: “Receipts are up by £1.1B relative to forecasts for the fiscal year so far on a cumulative basis, so Mr. Healey can take some small comfort that the revenue problem faced by his predecessor appears to have abated.”
August alone produced a £2.3bn spending overshoot.
The consultancy expects fiscal headroom for 2029/30 to shrink from £23.6bn to £11.5bn, largely because higher inflation increases debt-interest costs.
That would more than halve the projected buffer against the fiscal rules before the government addresses further pressures from housing, social care and defence.
The figures sharpen the Budget concerns already facing Sterling.
We see the currency risk in how the Chancellor responds on 28 October: tax increases or spending restraint could weigh on growth, while an unconvincing borrowing plan could undermine confidence in UK assets.
Our currency coverage draws on live market data, official economic releases and published bank research.
