Public spending outpaces receipts

The Office for National Statistics (ONS) published the monthly public sector finances for May 2026 on Friday 19 June. The ONS reported a provisional fiscal deficit for the month of £23.3bn, which was £5.4bn more than in May 2025 and £5.6bn overbudget.

This brings the deficit for the first two months of the 2026/27 financial year to £46.3bn, £8.9bn more than in the same period a year previously, and £7.7bn more than budgeted.

Martin Wheatcroft, external advisor on public finances to ICAEW, said: “The provisional deficit for the first two months of the financial year was up almost £9bn from the same period last year – close to £8bn more than budgeted – as spending outpaced receipts. A £4bn, or 16%, increase in debt interest was just one element in a difficult story for the public finances.

“With Rachel Reeves searching high and low for every penny she can find to fund the Defence Investment Plan ahead of the NATO summit next month it is looking like the hope for a reduction in this financial year’s deficit to March 2027 is now in jeopardy just two months into the financial year.”

He continued: “The Prime Minister will also be despairing at the absence of any positive fiscal numbers as the pressures on the public finances mount ahead of a potential leadership challenge.”

Month of May 2026

The provisional shortfall of £23.3bn in the second month of the financial year was £5.4bn higher than in May 2025, with £4.7bn increase in the current budget deficit. There was also a £0.7bn increase in net investment to £18.5bn and £4.8bn respectively.

The increase in the current budget deficit reflected £8.4bn from higher spending partially offset by £3.7bn from higher receipts.

The deficit for the month was £5.6bn overbudget, comprising a £4.8bn negative variance on the current budget deficit plus a £0.8bn overspend on net investment.

Receipts of £94.8bn for the month were £4.5bn lower than the £99.3bn monthly average for the previous 12 months (excluding January 2026, the big self-assessment month). Meanwhile current spending, including depreciation of £113.3bn, was £6.2bn higher than the £107.1bn monthly average for the previous 12 months (including January 2026).

Net investment of £4.8bn was £1bn below the £5.8bn monthly average for the past 12 months (excluding March 2026 with its end-of-year capital rush).

Year-to-date

• The £8.9bn increase in the provisional shortfall to £46.3bn in the first two months of the financial year compared with the first two months of 2025/26 comprised:
• a current budget deficit up by £7.0bn to £34.5bn from the same period last year (£14.5bn from higher spending partially offset by £7.5bn from higher receipts), and
• net investment up by £1.9bn to £11.8bn.

The year-to-date deficit of £46.3bn was £7.7bn more than budgeted with a £6bn negative variance on the current budget deficit and a £1.7bn overspend on net investment.

Receipts of £190.7bn in the two months were 4% higher than in the same period a year ago as set out in Table 1, with:

• income tax up 6%,
• VAT up 4%,
• national insurance up 3%, and
• corporation tax up 5%.

Income tax receipts, in particular, benefited from fiscal drag.

Current spending including depreciation in April and May 2026 (also shown in Table 1) totalled £225.2bn, up 7% from the first two months of the previous financial year. The £14.5bn increase can be analysed between:

• a £5.5bn increase in spending on public services (up 5%),
• a £3.9bn increase in welfare (up 7%),
• £0.7bn in subsidies (up 12%), £3.7bn in debt interest (up 16%), and
• £0.7bn from higher depreciation (up 6%).

The 7% increase in the cost of welfare was partly down to benefit rises, including a 6.2% increase in the Universal Credit standard allowance and a 4.8% increase in the state pension from April 2026, combined with an increasing number of claimants (including more pensioners).

Debt interest had been expected to fall with lower inflation and lower interest rates but the conflict in Iran drove up inflation and stalled anticipated cuts in interest rates, with:

• a £2.2bn increase in the inflation uplift on index-linked gilts over the two months (from £5.6bn last year to £7.8bn for April and May 2026), and
• a £1.5bn increase in other debt interest (from £17.4bn to £18.9bn).

Net investment in April and May was up by £1.9bn to £11.8bn compared with a year previously, comprising:

• gross capital formation (ie, capital expenditure) up £1.6bn to £15.8bn, and
• capital grants (including research and development and irrecoverable student loans) up £1.0bn to £8.6bn.

These were offset by £0.7bn in higher depreciation up £0.7bn to £12.6bn.

Borrowing and debt 

Table 2 summarises how the government borrowed £66bn during April and May to take public-sector net debt to a provisional £2,984bn on 31 May 2026. This comprised public sector net borrowing (PSNB) of £46bn to fund the deficit plus £20bn of other borrowing to fund government lending and working capital requirements.

The ratio of public sector net debt to GDP increased by 1.3 percentage points from 93.8% of GDP at the start of the financial year to a provisional 95.1% on 31 May 2026. This is after 0.9 percentage points of ‘inflating away’ caused by inflation and economic growth adding to GDP (the denominator in the debt to GDP ratio).

Public sector net debt on 31 May 2026 of £2,984bn comprised gross debt of £3,471bn less cash and other liquid financial assets of £487bn.

Public sector net financial liabilities (PSNFL or ‘persnuffle’) of £2,657bn, incorporated £742bn in other financial liabilities less £1,069 in illiquid financial assets. Meanwhile public sector net worth of £750bn was net of £1,907bn in non-financial assets.

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 quarterly in arrears and are based on budget or high-level estimates in the absence of monthly data collection.

In this release the ONS reduced the previously reported numbers for the deficit in the year ended 31 March 2025 by £0.3bn (to £151.5bn), in the year ended 31 March 2026 by £1.0bn (to £128.0bn), and in the month of April 2026 by £1.3bn (to £23.0bn) to reflect updated data and the backdated reclassification of the Canal and River Trust to the private sector from October 2023 onwards.

The ONS also revised public sector net debt on 31 March 2026 up by £1bn (to £2,918bn).

• For further information, read the public sector finances release for May 2026.