By Andy Bruce and William Schomberg
April 23 (Reuters) - Britain's budget deficit for the last financial year narrowed to a six-year low but official data published on Thursday also showed an early impact of the Iran war as consumers scaled back their spending on fuel which has shot up in price.
Government borrowing in the 12 months to the end of March was equivalent to 4.3% of economic output - much bigger than before the COVID-19 pandemic but the smallest deficit since the 2019/20 financial year.
The gap of 132.0 billion pounds ($178.1 billion) was 0.7 billion pounds less than the most recent official forecast that underpins the budget plans of finance minister Rachel Reeves.
The total was down from 151.9 billion pounds in 2024/25.
However, debt interest spending in 2025/26 was 97.6 billion pounds, up from 85.4 billion pounds a year previously and marking the second-highest figure in cash terms since 2022/23, when inflation soared after Russia's invasion of Ukraine.
FUEL DUTY FALL SIGNALS IRAN WAR HITTING CONSUMERS
Reeves has highlighted the need to bring down Britain's debt costs as she tries to keep her budget plans on track to balance day-to-day spending with tax revenues by the end of the decade.
That so-called current budget deficit was equivalent to 1.7% of gross domestic product in 2025/26, 0.9 percentage points lower than the previous financial year and the lowest value since the 12 months to March 2020, when it was 0.7% of GDP.
But in a reminder of how the Iran war could add to the challenge of meeting her target, Thursday's data showed revenue from fuel duty - which is set at a fixed level - fell to 1.8 billion pounds in March, the lowest for any month since July 2023.
While representing only a fraction of government revenue, the drop in fuel duty in response to higher prices for petrol and diesel could be an early warning sign of how the war might weaken activity across the economy and hit overall tax revenues.
Last week, the International Monetary Fund cut Britain's economic growth forecasts for 2026 by more than for any other Group of Seven nation due to the country's exposure to higher energy prices with its heavy use of natural gas.
"A more stagflationary backdrop is forecast to take shape, with speculation already building about the impact of weaker growth on the Chancellor's headroom," Nabil Taleb, economist at PwC UK, said, referring to Reeves' ability to meet her borrowing target.
"Recent moves in bond markets, with gilt yields briefly touching 5% for the first time since 2008 before easing, also highlight the UK's vulnerability to uncertainty."
In March alone, the ONS reported public sector net borrowing of 12.6 billion pounds. Economists polled by Reuters had a median forecast of a 10.3 billion-pound deficit for the month.
($1 = 0.7412 pounds)
(Reporting by Andy Bruce; Editing by William Schomberg and Toby Chopra)
