The Chancellor’s fiscal strategy is unsustainable — what next?
Professor Joe Nellis July 24th 2025
Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
UK public sector borrowing has risen to £20.68 billion for June, further deepening the fiscal hole that the Chancellor will need to fill in the Autumn Budget and intensifying the immediate need to raise taxes or cut spending. The Chancellor’s fiscal strategy has been reliant on sustainable economic growth that is yet to appear — persistently high bond yields and an apparent inability to negotiate necessary spending cuts with her own party have made the current strategy even less viable.
The OBR’s July Fiscal Risks and Sustainability Report paints a worrying picture of the UK’s long-term debt trajectory. At 94% of GDP, UK debt is already the sixth-highest of advanced economies across the globe. On the current trajectory, this is set to rise to over 270% of GDP by the early 2070s. This is clearly not sustainable.
What can the Government do?
"The Chancellor is not in an enviable position, with no easy options available. The OBR’s report highlighted the increasing cost of the triple lock on pensions as the population ages. Despite the political unpopularity that a government already reeling from a backtrack on the Winter Fuel Allowance can barely afford, they must review the long-term sustainability of the policy. Whether this comes at the Autumn Budget this year remains to be seen."
Cuts to unprotected Government departments will happen but can only raise so much, and the likelihood of any meaningful cuts to the ever-growing welfare state has declined following the rebellion in the Labour Party against the recent Welfare Bill.
What we are very likely to see at the Budget is another set of tax rises. The freeze on income tax brackets will continue, effectively acting as a stealth tax on workers jumping tax brackets through inflation-level rather than real-terms pay rises. How else the Chancellor raises funds is unclear, especially if she is to maintain her fiscal rules and the pre-election promise to not raise taxes on ‘working people,’ although we have already seen a loosening of the meaning of that term.
Whether tax hikes target wealth, pensions, business, or other areas, they will not be conducive to economic growth, disincentivising investment and innovation, and pushing some wealth creators to up sticks and leave the country. Ultimately, any tax rises that stifle growth could leave the economy in a similar position again, creating a never-ending cycle where tax increases inevitably lead to more tax increases.
