Bond markets watch closely as Burnham hints at looser approach to public finances

The UK government borrowed less than anticipated in June, according to figures published by the Office for National Statistics, in a development that offers the new prime minister, Andy Burnham, some fiscal headroom as he announced plans to cut VAT on household electricity bills and signalled a departure from the economic approach of his predecessor. Public sector net borrowing – the shortfall between government spending and income – stood at £16bn last month, some £7.9bn lower than in June 2025 and marginally below the forecast of the Office for Budget Responsibility by £300m, a better-than-expected performance largely attributable to reduced inflation-linked debt interest costs. The figures come at a critical juncture for the new administration, with Burnham having used his first Downing Street address to promise a fresh direction for the British economy while emphasising his commitment to the fiscal rules set out by his predecessor, Keir Starmer, and the former chancellor, Rachel Reeves.

The improvement in the public finances arrives against a backdrop of persistent economic uncertainty, with Britain's economy having shown signs of resilience in recent months despite concerns over higher energy prices linked to the conflict in Iran, even as the government's borrowing costs have risen amid jitters in global bond markets and investor anxiety over the new prime minister's tax and spending plans. In a move designed to address household cost-of-living pressures, Burnham announced a VAT reduction on domestic electricity bills, to take effect from 1 October, which the newly appointed chancellor, John Healey, said would be funded this year by cancelling the digital ID programme. Healey, speaking with evident determination to establish his fiscal credentials, declared that "fiscal control is the first duty of any chancellor" and that "fiscal credibility is the bedrock for economic stability and for national security", adding that he and the prime minister had agreed to work "in lockstep to meet the fiscal rules with a buffer against uncertainty".

The retention of Labour's self-imposed borrowing and debt constraints, originally drawn up by Reeves, has been seen as vital to avoiding a backlash in the bond markets, which remain finely poised amid expectations that Burnham could pursue a looser approach to public finances than his predecessors. The new prime minister told reporters in the Downing Street garden on Monday that he could consider utilising "flexibility" in the fiscal rules to bolster public investment, comments that were interpreted by some investors as a signal for higher borrowing and which have done little to calm nerves in the City. With spending pressures looming on multiple fronts – not least in health, defence and local government – Healey could be forced to consider tax increases or other measures to help finance the new prime minister's agenda, even as he insisted that fiscal discipline would remain the cornerstone of his approach.

The latest borrowing figures, which came in below the predictions of City economists, provide some reassurance that the public finances are in better shape than had been feared, though the margin of improvement remains slender and the broader economic outlook is clouded by geopolitical uncertainty and the lingering effects of higher energy costs. The cancellation of the digital ID programme to fund the VAT cut on electricity bills represents a trade-off that will be closely scrutinised by business groups and privacy advocates alike, while the promised reduction in household energy costs offers a tangible benefit to voters grappling with the rising cost of living. The prime minister has insisted he will stick to Labour's fiscal rules and the party's manifesto tax promises, a stance that makes it more difficult for him to pursue a radically different path from Starmer, yet his comments on "flexibility" have left the door open to a more expansionary fiscal policy should he choose to walk through it.

As Healey prepares to deliver his first major fiscal statement, he will be acutely aware that the markets are watching for any sign that the new administration is prepared to loosen the purse strings without a credible plan to fund its ambitions. The chancellor's emphasis on "fiscal control" and "fiscal credibility" appears designed to reassure investors that the government's commitment to sound money remains intact, even as it seeks to chart a new economic course. The coming weeks will reveal whether the improvement in the borrowing figures represents a durable shift in the public finances or a temporary respite, and whether Burnham's promise of a new direction can be reconciled with the fiscal discipline that Healey has made his defining mantra. For now, however, the prime minister and his chancellor can point to the June borrowing data as evidence that their approach is off to a promising start, even as the challenges of balancing the books while funding their priorities loom large on the horizon.