The forecast rise in underlying borrowing from 2030-31 to 2031-32

In the central pre-measures forecast, that is before accounting for the effects of new policy measures, public sector net borrowing falls year on year by around half a per cent of GDP until 2030-31, at which point it is forecast to rise by 0.1 per cent to 2.0 per cent of GDP (Table A). This is an unusual pattern because typically at the end of the forecast – when the economy is usually assumed to be growing at trend and departmental spending is often assumed to be rising in line with nominal GDP – borrowing would be expected to be falling as a share of GDP. This is often driven by ‘fiscal drag’, where tax receipts rise as a share of GDP because earnings are assumed to rise faster than CPI inflation (which is used to uprate personal tax thresholds at the end of the forecast) and by some other areas of underlying buoyancy in the tax regime.

Table A: Pre-measures public sector borrowing

In the current forecast, however, public sector current receipts increase by an average of 0.3 per cent of GDP a year between 2026-27 and 2030-31, but are then flat at 42.6 per cent of GDP in 2031-32. Total managed expenditure falls between 2026-27 and 2030-31, by an average of 0.2 per cent of GDP, but then rises slightly in the final year. So the rise in PSNB in 2031-32 in the pre-measures forecast is driven by flat receipts and slightly rising spending as shares of GDP.

The drivers of these trends relate to the emergence of pressures that we identified in the 2026 Fiscal risks and sustainability (FRS) report and which will intensify over the longer term. Specifically, the upward pressure on pension spending from the ageing population, the reduction in tax revenues from the loss of fuel duty due to the transition to electric vehicles, and the increasing cost of debt interest due to the rising stock of debt. Looking at these components in more detail:

• Welfare spending is forecast to rise by around 0.1 per cent of GDP in 2031-32. This reflects increasing health-related caseloads and forecast growth in the state pension caseload due to the ageing population. Over previous years of the forecast, the underlying upward trend in pensioner spending is suppressed by the increase to the state pension age between April 2026 and March 2028. This is assessed in more detail in Box 5.1.
• Fuel duty receipts are forecast to decline slightly as a share of GDP in 2031-32, as the loss of revenue due to the transition to electric vehicles is greater than the increase in revenue from the assumed increase in fuel duty rates at this point. In addition, there are small declines in revenue as a share of GDP from assumed declines in the consumption of tobacco and alcohol, and from declining oil and gas revenues, as discussed in Chapter 4. Overall, the decline in revenues from these sources push up on borrowing by around 0.1 per cent of GDP.
• Debt interest spending increases borrowing by a further 0.1 per cent of GDP in 2031-32. This is driven by the rising stock of debt and by the rising number of gilts that are forecast to be refinanced at this time horizon at higher interest rates, discussed further in paragraph 5.29.

Overall, in 2031-32, these three effects increase borrowing by around 0.3 per cent of GDP, which more than offsets all the other pre-measures year-on-year changes to tax and spending which are forecast to reduce borrowing in 2031-32 by around 0.2 per cent of GDP. This includes some fiscal drag as earnings are forecast to rise faster than CPI at this time horizon. However, this effect is more muted than in previous years of the forecast where the personal tax thresholds are frozen.

In this Budget, the Government has decided to reduce the pre-measures assumption for the growth in departmental spending in 2031-32, which, combined with policies to increase taxation, helps reduce the forecast for borrowing in this year by 0.2 per cent of GDP. This means that, after the impact of policy, borrowing remains flat between 2030-31 and 2031-32 as a share of GDP. This is an early indication of the additional pressures that the long-term trends highlighted in the 2026 FRS will create for policy-makers aiming to put the public finances on a sustainable path over the coming decades.