Weekly Briefing: Borrowing Burden, Pensions Pushback, Spain Strategy & Labour Lag

This week’s developments point to a UK economy navigating external shocks alongside structural adjustments. Government borrowing has come under renewed pressure, while policymakers face resistance on pension reforms.

We’ll also cover efforts for the UK to strengthen international partnerships - particularly with Spain. Meanwhile, the labour market offers a mixed picture, with stability in headline figures but underlying weakness still very much evident.

Read on for the full context.

UK Borrowing

The UK government borrowed £14.3 billion in February, coming in higher than expected and marking an 18% increase year-on-year, according to the Office for National Statistics. While part of this rise was attributed to the timing of debt interest payments, the figures reinforce a broader picture of strained public finances.

Debt interest payments alone reached £13 billion for the month, up from £7.5 billion a year earlier, highlighting how servicing costs are becoming a more significant burden. Although January’s surplus was revised up to £31.9 billion, this has done little to offset concerns about the overall fiscal trajectory.

External pressures have compounded the situation. The escalation of the Iran conflict and its impact on global energy markets have pushed UK borrowing costs higher, with gilt markets experiencing sharp sell-offs. Britain’s reliance on imported natural gas has left it more exposed than many of its peers, particularly as inflation remains elevated.

This has placed Chancellor Rachel Reeves in a difficult position. On one hand, there is increasing political and public pressure to support households facing rising energy and fuel costs. On the other, fiscal headroom remains limited, raising the likelihood of tougher decisions in the autumn budget.

Despite this, borrowing for the financial year to date stands at £125.9 billion - around 12% lower than the same period last year. The Office for Budget Responsibility forecasts total borrowing of £132.7 billion for the year, suggesting some improvement, but still at a level that leaves little room for policy flexibility.

As Elliott Jordan-Doak of Pantheon Macroeconomics put it, “The chancellor will again have to make difficult decisions in the autumn budget unless hostilities end quickly and energy prices subside.”

Pension Power Pushed Back

The government’s attempt to influence where pension funds invest has faced a clear setback after the House of Lords voted to remove a key provision from the Pension Schemes Bill. The proposed “reserve power” would have allowed ministers to direct pension investments toward UK and private assets.

The amendment passed decisively, with peers voting 217 to 113 to strip out the measure. Opposition came from across the political spectrum, reflecting widespread concern within both Parliament and the pensions industry about government overreach.

Critics argued that even with assurances from ministers, the proposal risked undermining the independence of pension schemes. The strength of the response suggests a broader reluctance to allow direct political influence over long-term retirement savings.

The decision is a notable challenge for Pensions Minister Torsten Bell, who had recently attempted to reassure stakeholders that the power would be used in a limited and targeted way. The legislation will now return to the House of Commons, where ministers must decide whether to revise or abandon the proposal.

Alongside this, peers also backed a separate amendment to extend the definition of a “dormant” pension pot from 12 months to two years. This change reflects concerns about prematurely consolidating small pension pots, particularly those worth under £1,000.

As Baroness Stedman-Scott stated during the debate, “It is a massive overstep from the government, and despite the assurances of the minister, no one is yet convinced that this can remain.”

Spanish Investment Strategy

In contrast to domestic challenges, the government has taken a more outward-looking approach through strengthened economic ties with Spain. A £240 million investment from Spanish energy firm Exolum is set to support UK fuel storage, aviation resilience, and broader energy security.

This move aligns with the Chancellor’s wider strategy to build growth through international partnerships, particularly with European allies. The agreement also reflects a renewed emphasis on reducing trade friction and improving business certainty following recent economic volatility.

Further developments include a £587.6 million contract awarded to Indra Group, which will create 600 jobs in the UK through its operation of Transport for London’s ticketing system. This reinforces the role of foreign direct investment in supporting domestic employment and infrastructure.

Efforts to ease cross-border working have also somewhat progressed. New arrangements will simplify travel for UK service professionals working in Spain for short stays, a change that could generate an estimated £250 million in additional exports over five years. Given the UK’s position as the world’s second-largest exporter of services, this is a targeted and potentially high-impact adjustment.

The agreement also includes steps toward mutual recognition of professional qualifications, which should further reduce barriers for UK accountants, lawyers, and other service providers. This reflects a broader attempt to rebuild practical economic links with the EU without reopening wider political debates.

As Spanish Economy Minister Carlos Cuerpo noted, “No country can face the challenges of this era alone - economic security, technological transformation, climate change. The answer is more cooperation with trusted partners, not less.”

UK Labour Market

The UK labour market remains relatively stable on the surface, with unemployment holding at 5.2% in the three months to January, slightly below expectations, according to the Office for National Statistics. However, the underlying picture suggests a more fragile environment.

Payroll employment has shown modest gains, rising by 6,000 between December and January, with a further provisional increase of 20,000 in February. This points to some stabilisation in hiring following the uncertainty around November’s Budget.

Wage growth has also begun to ease, with private sector pay excluding bonuses rising by 3.3%, down from earlier levels and below forecasts. This may offer some reassurance to policymakers concerned about persistent inflationary pressures.

However, these improvements are set against a backdrop of rising external risks. As outlined earlier, the energy price shock linked to the Iran conflict is expected to push inflation higher again, complicating the Bank of England’s policy decisions.

The labour market itself shows signs of weakening beneath the headline figures. Youth unemployment has risen to 14.5%, and economists warn that higher energy costs could lead firms to reduce hiring or cut jobs in the coming months.

Thomas Pugh of RSM UK captured the concern: “The data showed just how weak the labour market was coming into the Iran crisis,” adding that this backdrop would likely temper any aggressive shift in interest rate policy.

Final Note

This week’s developments highlight an economy facing immediate external pressures while continuing to adjust structurally at home. Rising borrowing costs and energy-driven uncertainty are testing fiscal resilience, even as policymakers pursue longer-term strategies through international partnerships and investment.

At the same time, resistance to policy intervention - as seen in pensions - and a softening labour market suggest limits to how quickly change can be implemented. The overall direction remains one of cautious navigation, with stability dependent as much on global conditions as on domestic policy choices.