Pound Slides, Gilts Suffer After UK Borrowing Overshoots Forecasts

Surprise fiscal shortfall roils markets as sterling falls and long-term yields spike

The British pound dropped sharply, its largest two-day fall since July, after UK public sector borrowing between April and August hit £83.8 billion, roughly £11.4 billion above forecasts from the Office for Budget Responsibility. The surge in borrowing worsened concerns about fiscal discipline, pushing gilt yields higher and stirring speculation that tax rises are inevitable in the upcoming November Budget.

What the Data Shows

• Public borrowing from April through August 2025 came in at £83.8 billion, missing the OBR’s forecast of about £72.4 billion for that period.
• For August alone, borrowing reached £18 billion, the highest August deficit in five years.
• Sterling fell about 1.1% over two days, trading near US$1.349, as markets digested the implications for debt sustainability and fiscal tightening.
• Gilts, especially long-dated ones (30-year), saw yields rise, with those yields now carrying their biggest premium over U.S. long bonds in three years.

Impacts & Implications

• Fiscal Pressure: The overshoot in borrowing tightens the government’s room for manoeuvre. Chancellor Rachel Reeves may need to introduce new tax measures or spending cuts in the November Budget to satisfy the UK’s fiscal rules.
• Monetary Policy Constraints: With inflation running at nearly twice the Bank of England’s 2% target, the BoE has less space to consider rate cuts without risking further inflationary pressure.
• Bond Market Volatility: Rising yields on gilts make financing more expensive for the UK government, especially for long maturity debt. The “risk premium” on UK borrowing is increasing.
• Currency Weakness: Sterling’s drop signals investor concern over public deficits and debt. A weaker pound could also amplify imported inflation, compounding inflation expectations.

Risks & What to Watch

• If tax-raising options are limited by political constraints (manifesto promises, public resistance), fiscal credibility may suffer.
• Continued weak revenue collection (e.g. VAT, national insurance) or rising benefit/spending costs could worsen borrowing.
• Inflation could stay elevated if import costs rise due to the weaker pound, or if expectations of future tax hikes dampen investment.
• Global interest rates and investor appetite for UK debt remain critical; if overseas demand wanes, yields could rise further.

In summary, the surge in UK borrowing foils budget forecasts, rattles sterling and gilts, and puts new pressure on the government ahead of its November fiscal plan. The core theme: fiscal slippage is now front and centre, markets are pricing in rising yields, weaker currency, and likely tougher policy measures ahead.