Key facts
- UK government debt has grown significantly over 25 years, ranking 5th among advanced economies.
- Debt interest spending is forecast at £111 billion this year, £64 billion higher than three years ago.
- Chancellor Reeves may need to tighten fiscal policy by at least £12 billion to meet her current budget surplus rule.
- A tightening of at least £17 billion is needed to meet the debt rule.
- A downgrade in the OBR's productivity forecast could increase public borrowing by billions.
Britain's Chancellor of the Exchequer, Rachel Reeves, faces significant fiscal challenges as she balances adherence to strict borrowing and spending rules with economic headwinds. The UK's government debt has grown substantially over the last 25 years, now ranking as the fifth-largest among advanced economies. This elevated debt, coupled with higher government borrowing costs, has driven up debt interest spending, which is forecast to reach £111 billion this year – a £64 billion increase from just three years ago.
A crucial factor influencing the upcoming budget will be the Office for Budget Responsibility's (OBR) productivity forecast. Productivity growth has fallen short of OBR expectations since the pandemic, and a downgrade is widely anticipated. Such a downgrade could lead to higher public sector net borrowing, with one scenario forecasting an additional £22 billion in borrowing by 2029-30 due to factors including higher interest rates and a weaker growth outlook.
To meet her fiscal rule of achieving a current budget surplus by 2029-30, the Chancellor may need to implement fiscal tightening measures of at least £12 billion. Furthermore, to meet the rule of public sector net financial liabilities falling as a share of national income by 2029-30, a tightening of at least £17 billion would be required under the central scenario.
Separately, Jonathan Hall of the Bank of England's Financial Policy Committee (FPC) highlighted that financial stability policy supports long-term growth by optimizing the balance between private sector resilience and public sector backstops, a framework that has seen significant progress since the 2007/8 financial crisis.
Some UK cabinet ministers are urging Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves to increase defense funding, following John Healey's resignation due to a spending dispute.