United Kingdom: Backloaded consolidation risks – Deutsche Bank

Deutsche Bank's latest UK Chart Of The Week, penned by Sanjay Raja, Shreyas Gopal, and Maui Brennan, reveals that UK fiscal consolidation since the 2024 election is mainly tax-driven and heavily backloaded. The trio emphasizes the surge in spending, concentrated tax measures, and reliance on behavioral savings, cautioning that limited fiscal room will squeeze the upcoming Budget under Chancellor Healey.

As Budget season commences, markets are preparing for a new government, vision, and economic strategy, but the same fiscal landscape remains. Chancellor Healey conveyed a more hopeful message during his opening remarks on September 7th. However, the fiscal challenges are real, with room for fiscal maneuver likely to drop by nearly half.

Firstly, fiscal consolidation is predominantly a tax issue with spending decisions over the past four fiscal cycles adding an average of GBP 82bn per year on a net basis. Tax hikes contribute around GBP 52bn. Secondly, there is substantial backloading in the fiscal plans, with gross tax consolidation being 2.3 times higher in 2029/30 compared to 2025/26.

Despite Chancellor Healey's adherence to fiscal rules and manifesto pledges, there appears to be minimal flexibility in the next Budget. The strategy of delaying consolidation, implementing efficiency savings, and depending on a few peripheral tax measures may once again take center stage on October 28th.