The Macroeconomic Outlook for the United Kingdom

The UK economy continues to be beset by significant headwinds. Consumer confidence remains low, and businesses continue to deal with the increased costs resulting from the rises in the National Minimum Wage (NMW), National Living Wage (NLW) and employer National Insurance Contributions (NICs). Although the United Kingdom is one of a handful of countries that have negotiated a deal with President Trump, UK firms are still facing a 10 per cent tariff and UK steel producers a 25 per cent tariff. And despite the end of the short war between Israel and Iran, geopolitical tensions remain high with the ongoing war in Ukraine as well as the events in Gaza, Israel and Syria. Despite these external factors, it is arguably the UK fiscal outlook that remains the greatest risk to the UK economy. Although the Office for Budget Responsibility (OBR) estimated that the Chancellor met her fiscal rules by £9.9 billion as a result of the policies announced in the Spring Statement (OBR, 2025a), it is fairly clear that this is no longer the case given the inability of the Government to pass its planned legislation on welfare reforms and the partial U-turn on pensioner winter fuel payments. In addition, revised public–sector finance figures for 2024– 25 have shown that borrowing over the fiscal year was £11.0 billion higher than the OBR had thought it had been. As a result, we are forecasting a current budget deficit of £41.2 billion in 2029-30. This is the gap that the Chancellor will need to fill if she is to adhere to her fiscal rules, and this will mean either higher taxes, lower spending, or both. Thinking more broadly and longer–term, the issue is not so much whether the Chancellor meets her fiscal rules, but whether the financial markets are prepared to continue lending to the UK Government at reasonable interest rates. In turn, this depends on the overall sustainability of public finances. The OBR's Fiscal Risks and Sustainability Report (OBR, 2025b) discusses the issues around the long–run sustainability of the public finances, suggesting that they are in a relatively vulnerable position and that efforts to put them on a more sustainable footing have not really managed to do so. A simple way of illustrating the problem is to use the government budget constraint and our estimates of trend GDP growth, 1.25 per cent, and the natural real rate of interest, 1.5 per cent. Given these numbers, if the Government wished to stabilise debt at 100 per cent of GDP in the long run, then it would need to run a primary surplus of 0.25 per cent of GDP every year. The OBR (2025a) estimated that the Government ran a primary deficit of 1.9 per cent of GDP in 2024-25. Millard (2025) argues for a new fiscal framework that would require the Government to move quickly to the required primary surplus (plus a buffer) and then stay there by adhering to a rule based around a path for government spending. This 'back–of–the–envelope' calculation also emphasises the importance of economic growth in ensuring fiscal sustainability. If trend growth were to rise to 2.0 per cent, rather than 1.25 per cent, then the Government could run a permanent primary deficit of 0.4 per cent while still maintaining the sustainability of public finances. Of course, economic growth is important more generally if living standards across the country are to be raised, and this is why the government has made it their number one mission. As stressed by Chadha and Samiri (2025), raising the growth rate will require higher public and private investment, particularly in technologies with spillovers into other industries, AI being a potential example of this. As we said in our response to the Comprehensive Spending Review in June (Caswell et al., 2025a), the increase in public investment in housing, transport, and defence announced within the Review is welcome and should lead to slightly higher growth over time. However, as we argued in van Ark et al. (2025), a more 'joined up' approach is needed where No. 10 is fused with the Cabinet Office to create a Prime Minister's Department to take overall charge of growth, enabling better prime ministerial leadership, while simultaneously granting mayoral authorities wider tax–raising and spending freedoms. It will also be important to embed industrial policy across government with a focus on place, aligning investment in housing, transport and skills. Even with the best will in the world, however, it will take time for investment to lead to higher growth and currently we still expect growth to average around 1.25 per cent into the medium term. More immediately, although GDP fell between March and May, we still expect growth of 0.2 per cent in the second quarter of this year, following growth of 0.7 per cent in the first quarter, and 0.4 per cent in the third quarter. These nowcasts and forecasts are published in our 'GDP Tracker' (Low, 2025) and Box A discusses how well they perform when compared with a number of more sophisticated approaches to producing GDP nowcasts. For the year as a whole, we forecast UK GDP to grow by 1.3 per cent, and looking forward we expect GDP growth of 1.2 per cent in 2026 (figure 1.1). Given the risks to our GDP growth forecast discussed above, we judge the overall risks around our projection for UK GDP growth to be on the downside as reflected in our fan chart (figure 1.1).