UK Key Themes 2025: Worrying debt dynamics shift into focus

Some forecasters – including the Office for Budget Responsibility and the Bank of England – have become more optimistic about prospects for 2025, arguing the large rise in day-to-day government spending announced in the Budget will cause demand to surge. However, we think the chances that the UK economy accelerates to a 2% growth pace in 2025 are low. The UK has several long-running structural problems to solve and there’s much the new government needs to do.

In our Research Briefing, we delve into four key themes shaping the economic outlook for the UK in 2025:

• Fiscal sustainability concerns will linger. The UK’s debt dynamics are among the worst of the advanced economies. With little headroom against the fiscal rules, the Chancellor will come under pressure to implement further tax hikes.
• Tight policy settings will weigh on activity. Though the Budget lessened the squeeze, fiscal policy will still tighten significantly in this parliament. We calculate that the new plans still imply substantial fiscal tightening of 0.7% of potential GDP in 2025-2026. This would be comparable to the most restrictive years of the 2010-2015 austerity programme.
• Trump’s tariffs will have a limited impact. We expect US tariff increases to be targeted and the UK is unlikely to be directly affected. Still, UK firms that are heavily reliant on exporting to the US will face a prolonged period of uncertainty. This will be damaging for confidence and, coming alongside the impact of the NICs increase, means a relatively soft outlook for business investment in 2025.
• UK asset prices may continue to carry a high risk premium. Looser fiscal rules and a more volatile inflation outlook imply a higher nominal neutral interest rate. But the risk premium on the front end of the yield curve looks excessive.

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