Two stark reports in the past week have reignited concern over the UK’s economic future—one showing a dip in monthly GDP, the other forecasting a potentially explosive rise in government debt. Together, they paint a sobering picture for Chancellor Rachel Reeves as she prepares for her first autumn Budget.
Friday’s growth figures revealed a further dip in GDP for May, reinforcing fears of a sluggish economy. But it was the Office for Budget Responsibility’s (OBR) long-term fiscal sustainability report that rang the loudest alarm bells. It warned of “daunting” risks to the UK’s public finances and projected that, without urgent action, government debt could triple the size of the economy by 2075.
While such distant forecasts often attract scepticism, the tone of OBR chairman Richard Hughes was unusually forthright. “The UK cannot afford the array of promises displayed to the public,” he said, citing persistent patterns of U-turns on tax and spending from successive governments.
The OBR’s findings are stark: among 36 advanced economies, the UK ranks sixth for national debt, fifth for annual borrowing, and third for borrowing costs. The implication is clear—relying on ever-increasing borrowing to fund rising public services is not a viable long-term strategy.
Yet the pressures to spend more are growing, driven by rising social care costs, increased disability claims post-pandemic, and escalating defence commitments. Local councils are already spending nearly 60% of their budgets on social care, with some exceeding 80%. A temporary £4.6 billion package to plug funding holes in special educational needs risks leaving many local authorities on the brink of bankruptcy.
Meanwhile, pledges such as increasing defence spending to 3.5% of GDP by 2035 could add nearly £40 billion to the annual budget.
A moment of reckoning
The OBR’s report is a polite but firm call for realism. With a strong parliamentary majority and a clear electoral mandate, the government now has the power—and arguably the responsibility—to level with the public about what’s coming: significant tax rises.
According to Treasury insiders, the autumn Budget could involve between £10 billion and £20 billion in additional tax measures. Some of that may come from a continued freeze on income tax thresholds, but that alone won’t be enough.
There are already strong signals that the Treasury is considering wealth-related taxation, particularly on property and inheritance, as the country braces for a multi-trillion-pound intergenerational transfer of housing wealth from baby boomers to their children.
The rationale is to fund the growing costs of an ageing population without placing the full tax burden on younger, working households. Expect inheritance tax, capital gains, and possibly council tax reform to enter the conversation.
Kitchen sink Budget?
Reeves may opt for a so-called “kitchen sink” approach this autumn—throwing every available option at restoring fiscal credibility. One priority will be to rebuild the fragile £10 billion of headroom she currently has under her own fiscal rules, which require debt to fall as a share of GDP by the end of the Parliament.
She’s reportedly considering the International Monetary Fund’s advice to move to a single fiscal event per year, offering more predictability and stability. But difficult spending decisions may still lie ahead—particularly in health-related welfare. Ministers have not ruled out reforming the Personal Independence Payment (PIP) system, especially given the sharp rise in claims related to mental health.
The state pension triple lock, however, appears politically untouchable, despite its rapidly escalating cost.
Silver linings—and storm clouds
There are some glimmers of hope. Confidence has picked up modestly in recent weeks, and economists predict further interest rate cuts in the coming months. The UK’s status as a comparatively stable investment environment is attracting high-profile praise from global tech leaders like Nvidia CEO Jensen Huang, who recently hailed Britain as a “powerhouse” for AI innovation.
Reeves’ fiscal rules do allow for longer-term investment in infrastructure, and planning reforms could—eventually—unlock construction-led growth. But the clock is ticking.
Markets remain strong and sterling stable for now. Yet the global environment is becoming more volatile, not least due to Trump-era tariffs and shifting geopolitical alignments. These trends are pushing up UK borrowing costs and reducing the traditional safe-haven status of US debt and the dollar—changes that could ripple across global bond markets, including Britain’s.
Reality check
In short, the Chancellor faces a stark balancing act: delivering on promises to invest, maintaining fiscal discipline, and preparing the electorate for tough tax rises. The OBR’s report was a clear warning that the time for short-term fixes is over.
Whether Rachel Reeves chooses a bold fiscal reset or cautious incrementalism, this autumn’s Budget will be a defining moment—not just for her tenure at the Treasury, but for the economic direction of the country for the next decade.
