Public sector finances were again in worse shape than expected in July. Overall net borrowing (PSNB) was £2.18 billion, well down on June's smaller revised £12.55 billion but £1.7 billon above the market consensus and even further above the £0.37 billion recorded a year ago. Excluding public sector banks (PSNB-X), the red ink stood at £3.10 after a downwardly revised £13.48 billion at quarter-end and £1.29 billion in July 2023. Both July readings were the highest for the month since 2021.

Total public sector spending was up £3.8 billion on the year as the effects of inflation more than offset a reduction in debt interest payments. Receipts were up £3.0 billion. Net debt was 99.4 percent of GDP, unchanged from June but 3.8 percentage points higher than in July 2023 and roughly in line with the levels last seen in the early 1960s.

The July PSNB-X was £3.0 billion more than forecast by the Office for Budget Responsibility (OBR) and so again underlines the fiscal problems facing the new Labour government. Today's update trims the UK RPI to minus 28 and the RPI-P to minus 19, both measures showing a modest degree of overall economic underperformance.

July is a seasonally good month for public sector finances, reflected in market expectations for a sharp decline in overall borrowing (PSNB) from June's £13.59 billion to just £0.5 billion.

The public sector net borrowing requirement (PSNB) is the difference between the sector's receipts and expenditure and so provides a simple measure of government fiscal policy. In response to the global economic crisis in 2008/09 the UK government introduced a number of measures designed to show the underlying state of public sector finances by omitting temporary distortions caused by financial interventions. It bases its fiscal policy on these measures. To this end, the underlying gauge of government borrowing watched most closely by financial markets is the PSNB-X which takes overall net borrowing (PSNB) but excludes public sector banks.

Changes in public sector finances can be used to determine the thrust of the government's fiscal policy. Generally speaking when the government has a rising deficit (or falling surplus) it is loosening its fiscal stance with a view to boosting economic activity. When its deficit is falling (or surplus rising), fiscal policy is being tightened in order to slow economic growth. However, sometimes changes in government financial positions can be due to factors outside of the government's control and do not signal an explicit shift in policy. This means that great care is needed in interpreting the data.