The Big Picture for the forthcoming UK Budget that the media largely ignores

 

Budget coverage in the media is understandably all about the details. What taxes are going up or down? How do the OBR forecasts compare to last year or six months ago? Has the fiscal headroom gone up or down? In all this it is easy to lose the big picture. Yet when some media outlets do attempt to do big picture previews, they often get things very wrong. This post tries to correct that, and suggests why the Budget is unlikely to change that picture.

The big picture presented in much of the media is one of general gloom, if not crisis. This is not confined to right wing media, or cliches from Andy Haldane. Here is the director of the Institute for Government talking about “the gravity of the fiscal position”. From this vibe you might think that the deficit is increasing, whereas in fact the government’s current balance (the key measure for the sensible fiscal rule) fell from a deficit of 2.5% of GDP in 2024/5 to a deficit of 1.5% in 2025/6. As I show below, when you look at other countries this gloom is certainly not warranted.

I think a lot of the gloom comes from the media’s obsession with the bond markets, coupled with a general misinterpretation that the UK’s comparatively high interest rate on government debt is due to scepticism about Labour’s fiscal credibility. While scepticism about any politician’s fiscal plans is usually warranted, to suggest this is why UK long term interest rates are relatively high seems nonsense to me. A far more plausible explanation is market pessimism about UK inflation relative to other countries, as I set out here.

Here are three key points giving the big picture on current UK fiscal policy as I see it.

1. The UK is in the middle of a large fiscal contraction/consolidation that is far greater than any other G7 economy

Here is a chart from the October IMF forecasts, based on existing and projected policies in each country.

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The UK budget deficit fell last year, and is expected to fall further this year. If the IMF forecasts are right the UK will have the lowest budget deficit as a percentage of GDP of these four economies this year. Furthermore that consolidation is forecast to continue over the next few years. By 2029 the UK is expected to have the lowest budget deficit of all the G7.

All of which might come as a surprise to many who have absorbed the gloom vibe coming from the media. Even if you believe that the size of budget deficits influence interest rates independent of their impact on inflation (which I generally don’t), the chart shows why the idea that high UK rates relative to the other G7 is because of deficit concerns doesn’t hold water. While it is highly likely that there will be some slippage from this projected path for the UK, slippage by other countries faced with similar global pressures is also likely.

None of this, including any changes in the forthcoming budget, is likely to change the key message of this chart, which is that the UK is tightening fiscal policy to reduce the budget deficit, something that isn’t happening to the same extent (if at all) in other G7 economies. The direction of travel is what is critical here, rather than the speed at which goals are reached.

2. This fiscal consolidation is being achieved mainly through higher taxes rather than cuts in spending

The table below is from the pre-budget OBR fiscal database, with everything as a percentage of GDP.