European governments have cut their borrowing at the start of their fiscal years, but further progress is set to be more challenging if growth slows in response to higher energy costs that have accompanied the Middle East conflict.
The U.K.'s Office for National Statistics on Tuesday said the government borrowed 16 billion pounds ($21.49 billion) in the third month of the new fiscal year, down 7.9 billion pounds on the same month in 2025.
For the fiscal year to date, borrowing totaled 57.6 billion pounds, a decline of 3.7 billion pounds compared to the same period last year, but 2.7 billion pounds above projections published by the Office for Budget Responsibility.
In a separate release, the European Union's statistics agency said the combined borrowing of the 21 eurozone governments fell to 3.1% of the currency area's gross domestic product in the first three months of 2026 from 3.2% in the final quarter of 2025.
The decline in U.K. government borrowing during June was largely due to a fall in interest payments to 11.8 billion pounds, down 5.3 billion pounds from the same month last year.
The decline in interest costs reflects a drop in inflation over recent months. Compared to its peers, bonds paying an interest rate that is linked to inflation account for a larger share of the U.K. government debt.
However, with energy prices rebounding as the U.S. and Iran continue to exchange fire across the Strait of Hormuz, interest payments are likely to rise again.
"The debt interest bill facing the government remains worryingly high, and the OBR expects that to continue over the next several years," said Nick Ridpath, an economist at the Institute for Fiscal Studies. "We could well see it surpass its forecast this year, if inflation and interest rates stay elevated."
The mixed news on borrowing comes as Andy Burnham takes over as prime minister. He named former defense minister John Healey as his treasury chief late Monday.
Investors worry that Burnham's efforts to boost growth will lead to higher borrowing. The new prime minister has promised to present a 10-year plan for the country later this year that would offer "a new political model and a new economic model."
The new government on Tuesday said it would suspend a 5% tax on home electricity bills from October, at a cost in lost revenue of 850 million pounds that will be paid for by abandoning a plan to introduce identity cards.
"The limitations around this fiscal proposal leave it looking symbolic rather than materially altering the cost of living," wrote Allan Monks, an economist at JP Morgan, in a note to clients.
The government said any further measures will be announced as part of its budget later this year, backed by forecasts from the OBR.
"All decisions at that point will continue to be funded and also consistent with the government's fiscal rules," it said.
In the fiscal year that ended in early April, the government reduced the gap between spending and revenue to its narrowest since the outbreak of the Covid-19 pandemic, and planned to further cut its budget deficit over coming years.
According to March projections, the OBR expects the government to borrow 115.5 billion pounds in the fiscal year ending April 5, 2027, a drop from 129 billion pounds in the fiscal year that ended on April 5, 2026.
That would be equivalent to a narrowing of the budget gap to 3.6% of GDP from 4.3%.
However, that reduction depends on the economy growing by 1.1% this year, an outcome that seems less likely as the escalation of the conflict in the Middle East keeps energy prices high.
The European Commission has already raised its forecast for eurozone government borrowing to reflect the impact of the conflict on growth. It now sees the combined budget deficits of member governments rising to 3.3% of GDP in 2026 from 2.9% in 2025.
However, for both the U.K. and the eurozone, budget deficits are set to be significantly narrower than in the U.S. The Congressional Budget Office expects the U.S. budget deficit to be 5.7% of GDP in the fiscal year ending September, rising to 5.8% in the next fiscal year.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
July 21, 2026 05:50 ET (09:50 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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