Mind the Fiscal Gap
The UK economy is misfiring, posing a severe challenge for Chancellor Rachel Reeves ahead of the Autumn Budget. Latest data shows that growth slowed sharply to just 0.1% in Q3, with real GDP per head flat, confirming that the recovery remains weak and uneven. This sluggish performance leaves the UK lagging behind its G7 peers as it struggles with stubborn inflation, weak investment, and strained public finances.
The weakness is broad-based. Business investment fell by 0.3%, while consumer spending remains subdued amid the ongoing erosion of household purchasing power. The lingering effects of last year’s employers’ National Insurance rise continue to weigh on firms, while a temporary cyber-attack on Jaguar Land Rover significantly dragged down Q3 output, suggesting a one-off shock but not disguising the underlying fragility of the economy.
With unemployment now at a four-year high (5.0% in September) and inflation still running at 3.8%, nearly double the Bank of England’s 2% target, the BoE has held rates at 4.00% to maintain a tight stance against inflation. However, expectations are mounting for a December rate cut, with markets pricing in an ~86% probability following the latest weak GDP figures, contributing to renewed Sterling weakness against major currencies.
Amid this slowdown, the fiscal backdrop has darkened. Government borrowing reached roughly £100 billion in the first half of FY2025/26, pushing public sector net debt to around 95% of GDP. The Office for Budget Responsibility (OBR) is expected to downgrade productivity and fiscal headroom estimates, creating a “fiscal hole” of around £30 billion, and prompting warnings of a potential “doom loop”: the risk that fiscal consolidation to satisfy bond markets and control debt could further choke off already weak growth.
Faced with this dilemma, the Autumn Budget on 26 November will be a high-stakes balancing act. Reeves is boxed in by the need to restore fiscal credibility while supporting a faltering economy. While headline tax rates such as National Insurance, and VAT may remain unchanged, additional revenue could be raised through “fiscal drag”, the freezing of thresholds that quietly lifts the tax take as wages rise, and potential increases to income tax. Targeted spending cuts and the reprofiling of investment may also feature as the Treasury seeks to plug the shortfall.
The Budget’s success will depend on Reeves’s ability to rebuild confidence without stifling activity. With growth stagnating, inflation still elevated, and fiscal space narrowing, the UK finds itself on a tight policy tightrope, one misstep away from a deeper slowdown.
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