UK Economic Risks and Fiscal Pressures Intensify: A Comprehensive Analysis

By: Payel

Published on: Apr 07, 2025

Introduction

The UK economy faces mounting challenges as fiscal pressures intensify and external risks loom large. Despite the country's robust institutional framework, the status of sterling as a reserve currency, and deep domestic capital markets, rising public debt, volatile gilt markets, and weakening external trade conditions pose significant threats. This article explores the UK's economic outlook, fiscal constraints, and the impact of recent US tariffs on growth prospects.

The UK’s Fiscal Challenges

Limited Budgetary Headspace

The UK’s Spring Statement restored fiscal headroom to £9.9 billion, matching projections from October 2024. However, this buffer remains precariously thin, leaving the government vulnerable to external shocks amid global economic and geopolitical uncertainties.

Key concerns include:

• Higher borrowing costs eroding fiscal flexibility


• Market expectations of further tax hikes, potentially dampening economic growth


• Downside risks to fiscal forecasts, possibly necessitating policy adjustments in the Autumn Budget

Rising Debt and Interest Costs

The UK’s debt sustainability outlook is worsening:

• Net interest payments are forecast to rise to 8.3% of government revenues by 2029, nearly triple the 2020 low of 3.1%.


• Public debt (excluding BoE) continues climbing, with general government debt projected to reach 114.2% of GDP by 2029, up from 99.5% in 2024.

External Risks: US Tariffs and Trade Pressures

The recent US tariff impositions add another layer of strain:

• 10% tariffs on £60 billion of UK exports (2.1% of GDP)


• 25% tariffs on steel and aluminium, effective since March 2025

These measures could weaken UK growth, with Scope Ratings forecasting just 1.0% GDP growth in 2025 and 1.3% in 2026.

Impact on Key Sectors

• Manufacturing and exports face reduced competitiveness


• Steel and aluminium industries hit hardest, risking job losses


• Current account deficits may widen further

Defence Spending and Fiscal Sustainability

The UK’s commitment to increase NATO defence spending to 2.5% of GDP by 2027 adds fiscal strain:

• While classified as capital expenditure, higher military outlays still pressure public finances


• Risks diverting funds from social and infrastructure investments

Policy Outlook: Autumn Budget Adjustments Likely

Given fiscal constraints, the Chancellor may need to:

• Introduce new revenue-raising measures (e.g., tax reforms)


• Reassess spending priorities to meet debt reduction targets


• Address gilt market volatility through tighter monetary-fiscal coordination

Conclusion

The UK’s economic resilience is being tested by rising debt, higher interest costs, and external trade shocks. With limited fiscal space and growing spending demands, the government faces tough choices in the Autumn Budget. Investors and policymakers must monitor:

• Debt sustainability trends


• US-UK trade relations


• Defence spending impacts on public finances