NEW: The Chancellor almost certainly has a fiscal repair job on her hands at next month’s Budget. But doing the bare minimum risks another fiscal groundhog day next year. 🧵 THREAD on our new IFS Green Budget's findings on the UK's economic outlook and fiscal situation:
The UK is by no means a fiscal outlier internationally. We are ‘middle of the pack’ on the scale of the deficit, and UK government borrowing is projected to fall by more than in other large economies.
But the UK’s stock of government debt has tripled since the start of the century. In the process, the UK has gone from having the 21st-largest debt among 37 advanced economies to having the 5th-largest.
Much-elevated debt combined with higher government borrowing costs has pushed up debt interest spending. It is forecast to be £111bn this year, £64bn higher than forecast just three years ago. £64bn is roughly equal to the day-to-day core schools budget.
Combined spending on the state pension, other pensioner benefits and debt interest is expected to reach almost 10% of GDP by 2029–30. The fact that it is these areas driving overall spending upwards makes deliverable and credible spending cuts harder to find.
UK inflation is above target and higher than elsewhere – one reason why interest rates are higher. Barclays judges that around 0.2ppts of inflation is from April’s employer NICs rise; a larger chunk is from energy and food prices, other tax changes, and regulated prices.
The @OBR_uk’s revised productivity forecast at the Budget will be a key determinant of the fiscal outlook. Productivity growth has repeatedly fallen short of the OBR’s forecasts, and a downgrade is now widely expected.
In addition, @OBR_uk’s forecasts for economic growth over this parliament are more optimistic than those from other forecasters. Barclays forecasts expect annual real GDP growth to average 1.4% from 2026 onwards, lower than the OBR’s average of 1.8%.
Under Barclays central economic scenario, forecast borrowing in 2029–30 would be £22bn higher than was expected in March. The Chancellor would need at least £12bn of savings to avoid borrowing for day-to-day spending in that year, as prescribed by her borrowing rule.
Much of this additional borrowing comes from known changes: U-turns and higher debt interest cost over £10bn. A downgrade to the growth forecast would make this worse: as a rule of thumb, each 0.1 percentage point downgrade might increase borrowing by some £7bn in 2029–30.
But just meeting the borrowing fiscal rule might not be enough. The Chancellor’s other fiscal rule is to have debt falling as a share of GDP in 2029–30: lower forecast growth in this scenario would force £17 billion of fiscal tightening to meet it.
Until 2022, it was very rare to leave less than 0.5% of GDP in headroom against the government’s fiscal rule. Now this has become commonplace under the last two Chancellors. This undermines the government’s stated objective of policy stability.
If the Chancellor wants to avoid a similar fiscal bind next time, a larger fiscal consolidation i.e. larger 'headroom' would be the most straightforward route. She will want to ensure that any planned fiscal consolidation is credible: the bond markets will be watching. “A key challenge is ensuring that fiscal groundhog day doesn’t become a twice-yearly ritual.” 📗 Read our Green Budget 2025 report, funded by @nuffieldfoundation.org in association with Barclays, here: ifs.org.uk 🖥️ Join our event at 9:30 here: ifs.org.uk