A useful measure of the UK’s national debt is its proportion to the economy’s overall size, and recent figures offer some positive insights. The government borrowed £132 billion in the fiscal year ending March, equivalent to 4.3% of GDP. This represents a 0.9 percentage point drop from the prior year and marks the lowest level in six years, since the 2.6% recorded in the year ending March 2020, before the COVID-19 crisis increased borrowing needs.
However, experts caution that the ongoing conflict with Iran could elevate UK borrowing and hinder economic expansion, potentially increasing the debt-to-GDP ratio this fiscal year.
Several British firms issued warnings today about the war’s effects on their operations. Supermarket retailer Sainsbury’s stated that the Middle East situation will affect both consumers and its business, with uncertain duration and scope. The company anticipates total underlying operating profit between £975 million and £1,075 million, while expecting retail free cash flow above £500 million.
Real estate agency Foxtons noted a downturn in the sales market, worsened by Middle East events that have dampened buyer confidence and influenced mortgage rates and access. CEO Guy Gittins emphasized efforts to control costs, boost efficiency, and adapt the sales division to counter market challenges.
Retailer WH Smith, which serves travel locations, reduced its profit outlook and adopted a more conservative stance due to the conflict’s impact on traveler volumes and public sentiment. The firm projects fiscal year 2026 headline group profit before tax and non-underlying items at £90 million to £105 million.
Economists in the financial sector predict that the Iran conflict will push UK borrowing upward, despite the minor decline reported for the previous fiscal year.
Investment strategist Lindsay James from Quilter commented that the Middle East unrest highlights the UK economy’s vulnerability to international disruptions. Still, strict fiscal measures appear effective, as March borrowing reached £12.6 billion, down £1.4 billion from last year and the lowest for that month since 2022. She noted that early spending concentration helped reduce borrowing, but rising inflation, debt servicing costs, and elevated gilt yields could erode fiscal flexibility for Chancellor Rachel Reeves, likely leading to greater reliance on taxes, which may stifle growth.
Ruth Gregory, deputy chief UK economist at Capital Economics, expects borrowing to increase in the current fiscal year from April to next March. While March data showed borrowing below the Office for Budget Responsibility’s forecast for 2025/26, this trend may not persist. She forecasts an energy price surge causing borrowing to exceed projections by £29 billion in 2026/27 and £13 billion annually thereafter.
Thomas Pugh, chief economist at RSM UK, suggests that the full-year borrowing of £132 billion for 2025/26, down from £151.9 billion previously and matching OBR estimates, is positive for the chancellor. However, the Iran war is expected to worsen conditions this year, restricting support options for households and businesses if energy costs climb. He anticipates March as the final month of favorable borrowing news, with gilt yields elevated post-war, rising interest on index-linked gilts, economic slowdown, potential unemployment increases, reduced tax revenues, and higher welfare expenses. Oil prices are climbing above $100.
