UK borrowing blew past forecasts and retail sales fell sharply in April, underlining the strains on the economy as Keir Starmer is engulfed in a prolonged leadership crisis.In twin blows to the government, the deficit hit £24.3 billion (€27.8 billion) in April, surpassing expectations and marking the worst start to a fiscal year since 2020. At the same time, retail sales dropped a steeper than expected 1.3 per cent as the energy shock from the Iran war hit household spending.The grim figures come as the turmoil engulfing the ruling Labour Party has left bond investors on edge, fearful that a change in leadership would lead to higher spending and government borrowing costs.Ruth Gregory, economist at the consultancy Capital Economics, said: “The drop in retail sales volumes and the public borrowing overshoot highlight the deteriorating growth outlook and fragile fiscal backdrop that will face whoever is in 10 Downing Street.”UK borrowing costs have surged since the Middle East conflict began in late February, as traders increased bets that the Bank of England would have to raise interest rates to counter the inflation shock.[ Bond vultures circle British government as threat of renewed political upheaval returnsOpens in new window ]April’s monthly borrowing surpassed the £20.9 billion forecast by the Office for Budget Responsibility, the UK’s fiscal watchdog, and was £4.9 billion higher than the same month last year.The Office for National Statistics data showed the deficit was driven by higher than expected government spending, including on social benefits.The rise in borrowing costs added to the strains on the public finances, with debt interest payments reaching £10.3 billion in April, a record for the month, when not adjusted for inflation.The bond market shrugged off the figures in early trading on Friday, with the yield on the 10-year gilt down 0.04 percentage points at 4.93 per cent, mirroring moves in other bond markets. Yields move inversely to prices.The current budget deficit — which measures day-to-day spending and is the key gauge in chancellor Rachel Reeves’ fiscal rules — was £17.4 billion in April, £2.6 billion above the OBR’s forecast.Responding to the borrowing figures, chief secretary to the Treasury Lucy Rigby said that the government’s “non-negotiable fiscal rules will be all the more important to continue to protect them [working families] as we face the consequences of the war that we have played no part in”.This week the IMF warned the UK not to relent in its efforts to cut the budget deficit, pointing to the risks from volatility in the bond markets.In an indication of the chilling effect of soaring energy prices, consumers held back on petrol purchases in April after stocking up in March, according to the ONS.April’s decline in retail sales exceeded the 0.6 per cent drop expected by economists, and came as March’s figure was revised down to an increase of 0.6 per cent from 0.7 per cent.But excluding petrol, overall retail volumes fell 0.4 per cent in the month, as clothing retailers as well as online sales were down from a year ago, with companies blaming the weather and lower demand. - Copyright The Financial Times Limited 2026