UK's budget deficit falls short of predicted figures
UK Government Borrowing Dipped Due to Business Tax Hike
In a surprising turn of events, Britain's government has borrowed less than anticipated over the initial months of the 2025/26 fiscal year. This reduction is partly thanks to an influx of business taxes after a recent increase in social security contributions.
The latest figures from the Office for National Statistics indicate that public sector borrowing for May stood at £17.686 billion, while experts had forecasted an average of £17.1 billion. Consequently, the government has borrowed £37.7 billion over the first two months of 2025/26, which is lower than the £40.7 billion predicted by the Office for Budget Responsibility.
These figures provide a glimpse of the impact from a significant hike in employer National Insurance contributions (NICs), effective from April. This rise in NICs has contributed around £30.2 billion to the government's coffers over April and May, setting a new record in cash terms.
Compared to the same period in 2024, social security contributions have increased by 17.5%, marking the most considerable increase in three years.
The recent increase in National Insurance contributions involves a 1.2 percentage point rise in the employer NIC rate and significant changes to the earnings threshold. Despite these increases, the government has launched an expanded Employment Allowance to help offset the burden on small businesses, promoting employment stability and economic growth.
While the heightened NIC rates boost revenues, they could escalate labor costs for employers, potentially slowing employment growth, limiting wage increases, or curtailing hiring—especially affecting part-time and lower-paid roles. Such economic consequences could, in turn, dilute the benefits of the increased NIC inflows and indirectly impact public sector borrowing requirements.
In summary, the 2025/26 National Insurance contribution modifications, particularly the 1.2 percentage point hike in employer NICs and the lowered secondary threshold, are designed to enhance government revenue, potentially easing public sector borrowing pressures by raising NIC revenues. However, the possible suppression of employment growth and wage inflation could partially counterbalance these benefits. The expanded Employment Allowance for employers functions as a balancing measure to support employment and economic resilience, which is crucial for a broad tax base and, by extension, influences the overall borrowing picture.
- The decrease in public sector borrowing can be attributed to the increase in business taxes, such as employer National Insurance contributions (NICs), which have generated an influx of revenue for the government.
- The UK government's coffers have experienced a significant boost due to a rise in business tax revenues, including employer NICs, following a hike in social security contributions, contributing around £30.2 billion over April and May.
