The next occupant of 10 Downing Street will inherit an economy that leaves no room for fiscal largesse. That is the blunt message from the latest GDP projections, which show the UK struggling to maintain even modest growth amid stubborn inflation and rising gilt yields. The Office for Budget Responsibility’s updated forecasts, released this morning, slash the growth outlook for 2025 to just 1.2%, down from 1.8% in March. The takeaway is clear: whoever wins the leadership contest must heed the bond market’s discipline or risk a rerun of last autumn’s turmoil.
Capital flight is already a concern. The pound dipped 0.4% against the dollar on the news, while the yield on 10-year gilts edged up to 4.3%, reflecting investors’ unease about the UK’s debt trajectory. The fiscal arithmetic is brutal: with borrowing costs rising and tax receipts faltering, the new prime minister will have precious little headroom for giveaways. The much-trailed ‘mini-budget’ of 2022 remains a cautionary tale. Markets punished unfunded tax cuts then; they will do so again.
Inflation, though down from its double-digit peak, is proving stickier than expected. Services inflation remains above 6%, and core CPI is hovering around 5.3%. This is forcing the Bank of England to keep rates higher for longer, adding to the government’s debt servicing costs. The fiscal rules look increasingly untenable. The current chancellor’s target for debt to be falling as a share of GDP by 2027-28 looks optimistic at best. The next prime minister will likely have to choose between breaking those rules or imposing further austerity.
The irony is that the economy is not in recession, but it feels like one for many households. Real wages are still below pre-pandemic levels, and the tax burden is at a 70-year high. The next leader will be tempted to promise tax cuts to revive growth, but the market will demand ironclad commitments to spending reductions in return. The old playbook of ‘borrow to invest’ is off the table when inflation is still a problem.
My advice to the contenders: Read the gilt yield curve. It is not a political document, but it will be the ultimate arbiter of your economic legacy. The bottom line is that fiscal discipline is no longer optional. It is the price of market credibility.
