UK by the numbers: breaking down the latest ONS stats

The UK Office for National Statistics (ONS) issued their monthly summary of the UK government’s income and expenses as well as the impact these have on the budget deficit and fiscal debt levels.

As has been the case in most months as of late, the public sector net borrowing during the month was higher than expected at £20.7 billion vis-à-vis a £17.5 billion expectation from the market. Monthly numbers exhibit seasonality due to the timing of tax receipts and of certain expenses, which is why it’s interesting to look at past numbers for the same month of each year. Sadly, the picture does not improve on this basis, as June 2025 represented the second largest net borrowing amount for June since monthly records began in 1993, only surpassed by June 2020. The main reason for the negative surprise seems to have been a higher interest expense on inflation indexed gilts than expected.

Another important benchmark for the market is how the numbers look year-to-date compared to the Office for Budget Responsibility’s (OBR’s) forecasts. Chancellor Reeves does somewhat better on this metric with the deficit so far this year aligning with that projected by the OBR. In the coming months, markets will be focusing on two main events.

First, the OBR periodically updates their projections, and the next revision is likely to include downgrades to growth. The current OBR expectation for 2026 is for 1.9% growth which in our opinion seems too high, while 2025 estimates were already downgraded to 1% in March. Lower growth has a negative impact on the tax intake and the debt to GDP ratio, amongst others.

Second, we’ve got the Autumn budget coming in late October. With the deficit running at c.5% of GDP and Public Sector Net Debt at 96.3%, the government is in need of a credible strategy to stabilise the debt trajectory. This can be done by cutting spending, increasing taxes, or growing more than current projections. With growth not expected to pick up in a meaningful way, markets are looking at spending and taxes. Cuts to the welfare bill were voted down in parliament some weeks ago, showing how difficult it is to pursue this avenue even with the government enjoying a large majority. Tax increases such as the abolition of the non-dom tax have been watered down as the threat of people affected leaving the country for tax purposes started materialising. Tears will be shed in late October as taxpayers are highly likely to see their tax bills increase in our opinion. There is no clarity yet as to which taxes will be raised but given the government had to change some of their proposed tax increases to the wealthier cohorts, we would not be surprised if this time the additional taxes impact a broader portion of the population.

The doom and gloom on the fiscal front are in stark contrast with the financial health of consumers and companies. The earnings reporting season has just started, but we expect to see healthy trends from banks and corporates we cover. Consumers continue to put aside a high amount of their earnings as savings for a rainy day, which means they have a comfortable cushion to help ride an economic downturn, should this occur. We will comment in greater detail on the banks earnings season once they report, but it is fair to say that as a result of consumers not being stretched and their strong capital levels, banks have not seen outsized impacts on their lending or their non-performing-loan formation so far. We expect this trend to continue as well as the outperformance of the financial sector when it comes to ratings upgrades. As an example, Moody’s data show that so far this year the ratio of upgrades to downgrades in the UK financial sector stands at a robust 2.67 while if we included all corporates, the ratio would fall to just under 1.0.

The aforementioned trends are in line with our long-held thesis that UK credit is likely to outperform other credit markets, while the opposite might be true of government bonds on a risk-adjusted basis. Of course, this prediction will not be valid on every single day or month, but over the long run, numbers show there is a premium in UK assets that we believe is worth playing for. This is exemplified in the graph below that shows total returns, all hedged back to dollars, for high yield indices in GBP, USD, and EUR. In the last 10 years, the GBP high yield index has delivered a currency hedged cumulative return of just over 90%, outpacing the USD high yield index by 21%. Average ratings are the same, but we note the GBP index has a shorter duration.

Looking at investment grade markets, we note that relative performance of gilts and Treasuries, and interest rate differentials at the short end of the curve, which impact the FX hedging costs, have translated in yields being quite significantly higher in GBP markets compared to EUR and USD markets. Currently the GBP corporate index has 50 basis points (bp) more yield on a currency hedged basis than the USD index as an example. Savvy medium-term investors would be aware that yields are a very accurate predictor over medium-term returns, particularly as you move higher in the ratings spectrum, therefore reducing the chances of having defaults.

Chancellor Reeves, as the ‘CFO’ of the country, has a much tougher job than corporate and household ‘CFOs’ at the moment. The choice for us can be summarised as follows: buy those assets that look good value from a fundamentals and valuations point of view and avoid those that don’t. This translates, in our opinion, into an overweigh in UK credit while having government bond exposure in other curves if possible.