At first glance, a modest improvement in Britain's public finances might appear a slender thread on which to hang fiscal optimism. Yet for Rachel Reeves, the Chancellor of the Exchequer, even a glimmer of good news is a welcome reprieve amid an otherwise troubling economic tableau.

Data released on Friday suggest that the UK's budget deficit is tracking slightly below expectations, thanks largely to a surge in corporate tax receipts and a sharp rise in National Insurance Contributions. Borrowing in May stood at £17.686 billion - just above consensus forecasts - but cumulative borrowing for the first two months of the financial year has reached £37.7 billion, comfortably under the Office for Budget Responsibility's projection of £40.7 billion.

This marginal outperformance will offer Reeves a modest cushion, a sliver of fiscal breathing space in a system otherwise constrained by the government's own stringent rules. Her latest spending review - a sprawling £2 trillion allocation - hinges precariously on a buffer equivalent to less than 1% of annual expenditure. That slender margin leaves little room for economic missteps.

The numbers offer a narrow comfort. A 17.5% year-on-year rise in social security contributions, driven by changes introduced in April, speaks to the government's capacity to extract revenue. But it is not yet clear whether this represents a sustainable trend or a one-off bump. Nor does it provide much armour against the headwinds on the horizon.

A rise in NICs

Britain's economic growth remains anaemic. The Bank of England's latest assessment points to a stalling recovery, while retail sales posted their sharpest monthly fall since December 2023. Inflation-linked bond payments are poised to surge next month, raising the spectre of ballooning debt-servicing costs. Meanwhile, geopolitical uncertainty, fragile business confidence, and the shadow of global trade fragmentation threaten to derail even the most carefully constructed fiscal plans.

“Borrowing was slightly better than expected in the first two months of the financial year, making the indicator a lonely amber light among the many red lights that are flashing with increasing rapidity on the government's economic and fiscal dashboard,”  Alison Ring, director of public sector and taxation at the Institute of Chartered Accountants in England and Wales, told Reuters.

Source: Office for National Statistics

Friday's ONS figures offered an early glimpse into the effects of a significant rise in employer National Insurance Contributions (NICs), which took effect in April and are collected a month in arrears.

As a major funding source for the Labour government's spending programme, compulsory social security contributions for April and May totalled £30.2 billion. This fell just short of OBR forecasts but marked a cash record. Compared with the same period in 2024, contributions rose by 17.5% - the highest annual increase in three years.

An ONS statistician cautioned that next month's figures are likely to reflect a “very high” interest payment on government debt, owing to the increased inflation metric used to calculate payouts on index-linked gilts.

The British government bond market has grown more volatile in recent years, as investors grapple with the uneasy combination of sluggish economic growth, high interest costs, and entrenched inflation.

UK 10YCash Source: MarketScreener

Last week, Reeves unveiled a multi-year spending review allocating more than £2 trillion across government departments.