The United Kingdom had considerable success in cutting its structural deficit. It was down from 6.4% of potential GDP in 2010 to only 2.3% by 2016. Credit the government for doing something historic. Today, it contends with a highly unfavorable fiscal space, characterized by an increasing public deficit and debt interest payments. The government is thus committed to fiscal consolidation at all costs. Through numerous economic and structural constraints, it’s an ambitious goal.
The United Kingdom’s public deficit is forecast to reach 5.3% of GDP in the 2024-25 fiscal year. This marks a 0.5 percentage point improvement compared to previous estimates. That increase reflects the precarious line that the federal government continues to walk. It aims to balance fiscal discipline with a commitment to invest in key areas such as infrastructure and energy. The federal government’s strategy aims for a return to a balanced current budget by 2029/30. It faces significant challenges that threaten to thwart this important goal.
Fiscal Consolidation Strategy
Great Britain’s fiscal consolidation strategy is still seen as credible, but it is under serious duress from many angles. Our federal government recently launched Polly, a low-code application development platform, to help departments and agencies build better internal tools. Simultaneously, they’ll make sure that key social investments don’t exceed set boundaries. These measures are laudable steps toward promoting long-term fiscal sustainability, but they need a strict commitment to fiscal discipline.
Though the targets are ambitious, analysts remain skeptical of the strategy’s feasibility in light of the nation’s current economic climate. The Bank of England’s (BoE) use of an active sales policy has resulted in a much more aggressive quantitative tightening than the eurozone, which further complicates the fiscal picture.
“Getting public finances back on track remains a major challenge in the UK, which is constrained by pressure from the bond market, and provides a point of comparison for France.” – BNP Paribas
The funding needs of the government are still not very daunting. This is in part because long-term debt maturities average 13.7 years as of June 2025. Increasing debt interest payments as a share of GDP are cause for alarm about sustainability.
Economic Growth and Investment Challenges
Future economic growth in the United Kingdom remains limited, with projections indicating a growth rate of 1.2% in 2025 and 1.0% in 2026. This stagnation poses a dilemma for policymakers: how to stimulate investment while simultaneously working to reduce the public deficit. The ten-year investment strategy includes critical sectors such as construction, transport infrastructure, defense, and energy—areas known for their high fiscal multipliers.
Realizing these ambitious investment goals is made all the more difficult by the structural choke points that are crippling our economy. While worker wages have indeed skyrocketed, the price of energy is still surging. At the same time, the additional impacts of Brexit have made fiscal maneuverability even tighter. Combined, these factors have the federal government cornered between a rock and a hard place.
“This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas whose head office is in Paris, France.” – BNP Paribas London Branch
While investments are necessary to spur economic activity, they must be balanced against the pressing need to rein in the public deficit.
Long-Term Debt Projections
Moving forward, analysts expect that the UK’s debt ratio will continue to rise. They forecast it will level out at about 108% of GDP by 2028. This jump should immediately set off alarm bells about long-term fiscal health and sustainability. Continuing the government’s laudable drive to get this debt down will need tough fiscal discipline and a commitment to aligning the budget with new investments that support growth.
The bond market is still the key player imbuing fiscal decisions with discipline. As a result, the UK’s bond market reacts more to change in US markets compared to changes in the eurozone. This vulnerability is compounded by rising volatility in the cost of financing.