07:42 AM EDT, 08/21/2025 (MT Newswires) -- The United Kingdom government borrowed less than expected in July, said Berenberg.

The monthly deficit of just one billion pounds was the smallest July shortfall for three years, noted the bank. Strong pay growth and the hike in employers' national insurance (a U.K. payroll tax) is causing a headache for the Bank of England, but it is doing its main job of bringing in more revenue.

The good result puts borrowing bang in line with the Office for Budget Responsibility's (OBR's) forecast and the fiscal deficit on track to fall from 5.1% of gross domestic product in 2024-25 to 3.9% of GDP in 2025-26.

Many commentators argue that a combination of U-turns on spending cuts, high borrowing in 2024-25 and poor productivity growth will cause the OBR to downgrade its GDP growth forecast and push up its government borrowing forecast this fall, stated Berenberg. If so, this would matter because the OBR is the government's official forecaster that sets the macroeconomic assumptions for the budget.

As the government's fiscal rule is to cover day-to-day spending with revenues by 2029-30, such a forecast downgrade could require remedial action. The OBR predicted that the government would meet the rule with just 9.9 billion pounds (0.3% of GDP) to spare in its latest projection from March.

Belt tightening appears politically impossible, leaving tax hikes as the only tool available to make up for disappointing economic performance, added the bank.

However, while government borrowing overshot the OBR's prediction by 11.5 billion pounds in 2024-25, so far this year, borrowing is bang in line with the official forecast. Admittedly, the overshoot last year came in the second half of the year. But with nominal GDP growth running well ahead of the OBR's prediction in H1 2025, Berenberg suspects that the tailwinds from strong income tax and VAT receipts will continue to blow.

That removes one of the reasons for the OBR to downgrade its forecasts. If the OBR avoids downgrading its productivity growth assumption too, the upward revision to the deficit forecast since the spring would just be about five billion pounds from failing to follow through with spending cuts, according to the bank.

The fact that the government has taken steps to tackle the fiscal deficit sets it apart from the likes of France and the United States. Bond investors give the U.K. little credit for this, with the 10-year government bond yield higher than that of any other developed market and 30-year yields recently hitting a 27-year high of 5.5%, added Berenberg.

Under the radar, the required fiscal adjustment is beginning to take place. If sustained, that should pare back the risk premium in U.K. bond prices, it concluded.