Market Pulse
Friday, August 1, 2025
Has Britain gone broke? In recent weeks, the UK’s public finances have drawn significant attention – and concern. As debt levels continue to climb and the government budget grows increasingly stretched, the country’s fiscal outlook has arguably never looked more challenging.
The UK does suffer from high public debt levels. Moreover, it’s clear that the country cannot continue on its current fiscal path without facing daunting long-term consequences. But neither is it too late to chart a new course.
With sound policies focused on economic growth, the UK can still build a pathway toward debt sustainability. While the Labour government’s focus on fiscal responsibility is encouraging, the current spending strategy is ill-suited for Britain’s challenges. In this special edition of Market Pulse, we’ll review the state of the UK’s finances and look at how the country might be able to find a more resilient fiscal footing.
In recent years, the UK has run significant public sector deficits. Over the past decade, annual deficits in the country have averaged slightly over 5% of GDP. In comparison, the average government deficit in the euro area last year was just 3.1%.
To cover the gap between tax revenue and public spending, the government has increasingly turned toward the bond market. Today, Britain’s debt-to-GDP ratio sits at nearly 104% of GDP. That makes the UK one of just 18 countries whose debt burden exceeds the size of the national economy.
Given current trends, this debt issue is only set to grow worse as government deficits persist. The Office for Budget Responsibility, the government’s fiscal watchdog, has called the current situation ‘unsustainable.’ In fact, the OBR warns that debt levels could spiral to 270% of GDP within 50 years without meaningful reform.
So far, it appears that bond markets have been willing to overlook the UK’s debt burden. But there are signs that this complacency could be changing. Recent sell-offs this summer are reminiscent of 2022’s ‘Truss moment,’ in which concerns over government fiscal policies sent gilt yields soaring.
And higher gilt yields only compound the country’s debt problems. When yields rise, investors demand higher rates on new bonds to match those on the market. That means the government needs to borrow more money just to cover higher interest costs. In 2025, the OBR expects the government’s interest bill to amount to more than 8% of all public spending.
The government hasn’t been blind to these fiscal challenges. In fact, a key aim of Starmer’s Labour government is to get public finances back on a sustainable footing. In an effort to do so, Chancellor Rachel Reeves has implemented a set of self-imposed fiscal rules on the government’s budget.
The full rules encompass many aspects of the government’s finances, but the most important stipulation is ensuring that day-to-day spending is matched by tax revenue by 2029. If achieved, this result could make significant progress toward shrinking the UK’s debt-to-GDP ratio. While the rules do offer some flexibility in the case of a ‘significant negative economic shock,’ Chancellor Reeves has so far declined to use this escape clause.
While efforts to fix public finances are laudable, solutions like these self-imposed rules are ultimately misguided. That’s because they treat budget deficits and government borrowing as a cause of Britain’s issues, rather than a symptom. Britain’s debt issues aren’t merely a story of profligate governments – they’re also the result of perennially slow economic growth in the country.
Over the past decade, Britain’s GDP growth has averaged just 1.4%. In comparison, the average for all high-income countries was 2.0%, a staggeringly large gap when compounded over ten years. Economic growth in the UK has failed to keep pace with the country’s needs, leading to low tax revenue, stretched public finances, and an expanding debt-to-GDP ratio.
Abiding by a set of fiscal rules does little to help solve this underlying problem of slow growth. Moreover, the rigidity of these rules could actually make growth challenges worse. Government spending can play an important role in stabilising the economy during slowdowns, something Reeves has shown little appetite for.
Ultimately, prioritising growth is the only sustainable solution for the UK’s budgetary woes. That’s true not just in an economic sense, but in a political one as well. Slashing spending without fostering growth results in painful austerity measures that voters are unlikely to accept, as evidenced by recent election results.
Any discussion of growth must start with the state of the UK’s capital markets. The withdrawal of listings from the LSE indicates that companies no longer think of the UK as a great place to do business. And investor performance has been lackluster, with the FTSE 100 earning just half the returns that the S&P 500 has generated over the past twenty years.
Changing this reality will take a ground-up overhaul, but the government’s recently unveiled Leeds Reforms indicate that capital markets reform is being taken seriously. Still, the proposed reforms do little to address one of the core reasons for the weakness of British capital markets – a poor retail investing culture in the UK. Fostering this culture will require easier access to investor education and measures that promote domestic share ownership by households.
Outside of capital markets, strategic public investment should also help promote national growth. While government spending may have helped contribute to the problem, it can also play a role in the solution. Investments in technology and infrastructure, for instance, tend to have strong multiplier effects when it comes to boosting long-term growth.
Britain isn’t broke – at least, not yet. But fostering the country’s capacity for wealth-building is essential to putting public finances back on track. While that aim won’t be achieved overnight, capital markets reform, strategic public investment, and a stronger retail investment culture can all serve as meaningful steps toward it. Without growth, austerity will not lead to prosperity.
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𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.
