via notayesmanseconomics:
It was kind of the new UK Prime Minister to so enthusiastically confirm one of my main economic themes yesterday afternoon/evening as this policy proposal appeared.
NEW: Andy Burnham has privately agreed to reverse Keir Starmer’s cuts and increase international aid spending to 0.7% of GNI. (@PoliticsUK)
This falls nicely into my argument that our political class has failed to adjust to a reality where our ten-year yield has moved from 0.5% to 5%. Regular readers will recall that back then I argued the UK should issue some century or 100 year bonds to lock in the cheap rates. But instead they prefer to borrow when it is much more expensive. It is particularly reckless when as I looked at only yesterday the United States is struggling with its own bond market as evidenced by the actions of Treasury Secretary Bessent.
The situation is as I described it on Twitter (X)
With bond markets in their present state to leak something like this you have to be one or both of these.
1. Out of touch.
2. Stupid.
As Hall and Oates put it.
You’re out of touchI’m out of time
The response to the leak is headlined by David Taylor the MP for Hemel Hempstead.
Fantastic news!
July Numbers
The tax and spend theme is quite evident in the headline.
Public sector borrowing was £1.8 billion in July 2026, the sixteenth-lowest July on record (not adjusted for inflation). This was £0.7 billion (68.7%) higher than a year earlier, because spending growth outpaced receipts despite strong self-assessed (SA) income tax revenue payments, typically received each July and January.
The simplest point is that we are borrowing in July which is a self-assessment month and thus with January can see a surplus. It does not help that borrowing is more than last year although as the difference is within the margin of error we can say policy remains the same. Then we see spending outpaced “strong” receipts.
Taxes
The self-assessment numbers were indeed strong.
SA income tax receipts were provisionally estimated at £17.1 billion in July 2026, £1.7 billion more than in July 2025. This was £0.4 billion less than forecast by the Office for Budget Responsibility (OBR) but the highest in any July since monthly records began, in 1999 (not adjusted for inflation).
For the OBR that is quite a near miss! But whilst one hopes that some growth is in there we are also seeing fiscal drag from the failure to raise the personal allowance and income tax thresholds as the government gets an inflation driven revenue boost.
VAT also rose by one billion to £18.5 billion which makes the explanation look rather curious.After all the growth rate at 6% is in fact slightly higher than the overall Income Tax rise.
The UK Government’s Great British Summer Savings scheme has temporarily reduced the Value Added Tax (VAT) rate on certain family-focused activities and children’s meals, from 25 July to 1 September 2026.
The scheme lowers the VAT rate on eligible transactions from 20% to 5%, reducing VAT receipts during the period it is in effect. The UK Government has estimated that the scheme will cost around £300 million in total.
As you can see the Office for National Statistics analysis only discusses a theoretical fall when in fact the numbers rose. That is a pretty basic fail before we get to the issue that it claims to be independent of government and that governments have a habit of being economical with the truth. I recall the analysis from Pantheon on Wednesday that could find no sign of a policy impact in the inflation numbers.
Anyway they rather skip any overall analysis so let me say that taxes were up by 4.6% or £4.6 billion on July 2025.
Government Spending
As you can see the ONS is a little short of detail in its overall analysis.
This month, spending on public services, benefits and other costs was higher than a year earlier. Although debt interest payable was lower than in recent months, it remained slightly above July 2025.
So let us take a closer look.
Capital uplift (the RPI-linked component) added £1.3 billion to interest payable in July 2026, largely reflecting the 0.2% increase in RPI between April and May 2026.
The overall rise is 10% higher which is rather more than “slightly” don’t you think? As well as the inflation component of an extra £200 million a year ago there was another of my themes in play. That is we will see a steady drip drip drip from higher conventional bond costs evidenced by the other category rising from £5.9 billion last year to £6.4 billion this. The trend received another push earlier this week from this.
The United Kingdom Debt Management Office (“DMO”) announces that the auction of £4,000 million of 4⅞% Treasury Gilt 2036
(ISIN Code: GB00BWBR1N39) has been allocated as follows:Non-competitive allotment price
(i.e. the rounded average accepted price)
£97.8375.155%
We will be paying that yield for the next ten years and it will be pulling our debt costs higher.
The presentation does manage to find a surplus.
The central government current budget, which represents the amount of borrowing required to fund its day-to-day activities, was in surplus by £3.5 billion in July 2026. This surplus was £0.7 billion smaller than in July 2025.
Although as you can see it was smaller than last year. As we got analysis of the £700 million rise in debt costs you might reasonably think the other £5 billion rise would get more but in fact not a peep. So let me help out as there was quite a sharp rise in net social benefits of 7.2% to £29.5 billion. Spending on goods and services only rose by 3% but that was still an extra £1.2 billion.
Bur overall expenditure rose by 5.4% so if we take official inflation are being around 3% then that is over a 2% rise so we have extra spending. Also we have higher tax growth at 4.9% which adds to the tax and spend theme by being lower than the spending rise.
Number Crunching
Central government net investment was £9.8 billion in July 2026, £0.5 billion more than in July 2025. This includes £3.1 billion transferred from HM Treasury to the Bank of England (BoE) Asset Purchase Facility (APF) Fund.
There are various issues here. Firstly in what respect is giving money to the Bank of England to cover its QE losses “investment” please? Next up is something of a swerve because remember when we counted the profits?
The quarterly payment from HM Treasury to the APF Fund was £0.3 billion lower in July 2026 than in July 2025. These transfers are intra-public sector transactions and, therefore, do not affect overall public sector borrowing, as they are recorded simultaneously as central government expenditure and as income received by the BoE.
Comment
The general theme continues with the fiscal year so far.
Borrowing in the financial year (FY) to July 2026 was £56.7 billion. This was £6.0 billion (9.6%) less than in the same period last year and £2.3 billion above the Office for Budget Responsibility (OBR) forecast.
Taxes overall were up by £22.6 billion so as you can see spending must have risen.
Returning to the Bank of England in the fiscal year so far..
This included a £8.2 billion payment to the Bank of England Asset Purchase Facility Fund, £0.7 billion more than in the FY to July 2025. These payments are recorded as both central government net investment expenditure and Bank of England receipts, so they have no effect on overall public sector borrowing.
The theme of Schrodinger’s Cat continues here.
Subsequent movements in the market value of these consolidated gilt holdings have no effect on the public sector balance sheet.
But seeing as they do not seem to know where they stand maybe it is not so bad.
This is largely because of updated Bank of England (BoE) data. Revisions of this magnitude are not uncommon, as some underlying BoE data are reported with a one-month lag.
That rather echoes when in your own career you have to be able to account every single evening.