UK deficit reduction plan leans on tax rises as spending pressures build

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UK deficit reduction plan

Highlights

IMF forecasts the UK budget deficit to fall from 6 per cent of GDP in 2024 to 1.4 per cent by 2031, with a primary surplus expected from 2028.
The OBR projects UK tax revenues will reach a record 38.5 per cent of GDP by 2030-31, driving the largest G7 revenue increase between 2026 and 2031.
Unprotected departmental budgets face steep real-terms cuts as overall spending stays near 43.5 per cent of GDP, raising political risk and doubts over fiscal tightening sustainability.

Fiscal path and Budget strategy

As reported by the Financial Times, IMF forecasts show the UK is on track to shrink its overall budget deficit from 6 per cent of GDP in 2024 to 3.8 per cent this year and 1.4 per cent by 2031. The projections also indicate Britain is set to run a primary surplus from 2028, excluding debt interest payments, while the EU is not expected to reach that point in the foreseeable future.

Chancellor John Healey is expected to use his first Budget to highlight stronger growth in the first half of the year as he promises "breathing space" for households and businesses hit by the global energy shock linked to the Iran war. He has repeatedly pointed to IMF projections showing the UK could have the lowest budget deficit in the G7 around the end of the decade while still adhering to the government's fiscal rules.

The planned improvement is being driven in large part by a rising tax take. In March, the Office for Budget Responsibility forecast that taxes would climb to a record 38.5 per cent of GDP by 2030-31, nearly 4 percentage points above 2024-25, while the UK is set to record the largest rise in government revenues as a share of GDP of any G7 country between 2026 and 2031.

Spending restraint challenge and market implications

Economists say the harder question is whether ministers can hold spending broadly steady as a share of the economy. UK government spending is forecast to remain around 43.5 per cent of GDP through the period, while EU public spending is also expected to stay broadly unchanged at about 50 per cent of GDP.

Rodrigo Valdés, head of fiscal policy at the IMF, says Britain's consolidation effort also has to come from spending restraint, not only tax increases. Andrew Wishart of Berenberg Bank says pushing taxes even higher to finance additional spending would be a difficult political sell, while Rob Wood of Pantheon Macroeconomics argues the government may struggle to deliver the planned tightening and could instead keep pushing consolidation further into the future as fiscal rules roll forward.

Pressure points are already emerging across departmental budgets. Ruth Curtice of the Resolution Foundation says unprotected areas such as justice and transport face steep real-terms cuts that could worsen with higher inflation, while defence spending would require more than £10bn to reach 3 per cent of GDP.

Curtice also says any move by Prime Minister Andy Burnham to advance priorities such as social care or housebuilding during the current parliament would add to spending commitments. That leaves the Budget facing a dual test, easing the cost-of-living squeeze while convincing markets and investors that the public finances can still be repaired over the medium term.

Paul Dales of Capital Economics says the UK's focus on borrowing control reflects lessons from the market turmoil after Liz Truss's 2022 mini-Budget. Even so, he says that with the tax burden heading for its highest level since the late 1940s, expenditure cuts may eventually need to play a larger role.

Healey’s IMF-backed deficit-reduction strategy ahead of the October 28 Budget set the tone for a tighter fiscal phase, as he argued the government must pair discipline with measures that support growth and investor confidence. Our publication also noted that a modest 0.1% rise in UK GDP in August offered limited evidence of resilience, while political pressure over potential tax and reform choices intensified in the run-up to the Budget.

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