Why the UK’s Repeat Austerity Panics Don’t Threaten Markets

Once again, the Office for Budget Responsibility (OBR) has weighed in on the UK’s public finances and economic outlook, calling rising debt a “daunting” risk to stability that will limit the Treasury’s options to respond to “future shocks.”^[i] And once again, headlines we follow are echoing this speculation, warning not only of debt’s alleged economic and market risks, but that the government will be forced to hike taxes in response—with a potential wealth tax taking centre stage.^[ii] Many commentators we follow noted long-term Gilt yields’ rise last Tuesday, arguing it was markets’ confirmation of trouble. (Never mind that yields eased Wednesday.)^[iii] Yet, in our view, a quick look at the numbers suggests UK debt is a political problem, not an economic one—and unlikely to threaten UK stocks.

Here is what we mean by “political problem.” In 1997, former Chancellor of the Exchequer Gordon Brown announced he would adopt a “Golden Rule” for fiscal policy to ensure deficits would stay tame.^[iv] Parliament then formalised this in 1998’s Finance Act, binding governments of both parties to official OBR forecasts.^[v] Chancellors have tweaked the rules here and there, but in general, they must target a balanced budget within five years. The OBR’s forecasts are the arbiter, and if it doesn’t project fiscal policy and economic developments will bring the budget in line within five years, austerity becomes the watchword. Again, this cuts across party lines.

If long-term economic forecasts were spot-on and if rising debt were an economic problem, then we would be sympathetic to the dire warnings OBR forecasts often inspire from commentators we follow. However, in our view, neither point is true. We find long-term forecasts, regardless of who makes them, tend to be a fruitless exercise. Throughout the many we have studied, their baseline assumptions for gross domestic product (GDP, a government-produced measure of economic output) growth, interest rates, inflation (broadly rising prices across the economy) and other variables are based mostly on historical averages and straight-line math. Reality tends to differ from both, based on our research. They also look at debt solely in nominal terms (unadjusted for inflation), overlooking that inflation reduces the relative burden of that debt by making future fixed payments worth less over time. Fisher Investments’ founder and Executive Chairman Ken Fisher explained this regarding US debt in a New York Post column. We think the logic applies in Britain, too.

More broadly, we have not yet seen evidence these rules actually erase the budget deficit. Since their adoption, the UK has rarely run a surplus. (Exhibit 1) Instead, what we find usually happens is that Chancellors (from both parties) tend to keep pushing out the five-year target. Given the UK economy has grown quite nicely overall during this stretch, with local stocks providing decent returns despite its value-heavy sectors not being in favour globally, we don’t think these deficits have hindered to growth or returns.^[vi] In our view, stocks have spent years signalling UK debt isn’t a problem.

Exhibit 1: Fiscal Rules Don’t Prevent UK Deficits

Source: Office for National Statistics, as of 9/7/2025. Rolling 12-month budget deficit, March 1998 – May 2025.

Continued deficits mean debt is rising, not just in raw terms but relative to GDP. (Exhibit 2) Hence, the going narrative amongst commentators we follow is that whilst deficits may not have been such a problem in the past, they will now make markets lose confidence in Gilts, causing borrowing costs to skyrocket.^[vii] 

Exhibit 2: The UK’s Rising Debt

Source: Office for National Statistics, as of 9/7/2025. Central government debt (as a percent of GDP), April 1997 – May 2025.

But if this were true, UK Gilt yields would probably be rising far out of step with global yields, as investors would demand more returns as compensation for the higher perceived risk. They aren’t. As it happens, UK Gilt yields are basically flat year to date and running parallel to US Treasury yields.^[viii] If investors aren’t demanding a huge premium to lend to Britain, it seems to us markets are more confident than headlines.

Which we think is rational. With debt, we find the amount outstanding is never what really matters. Yes, numbers in the trillions can seem astronomical and hard to comprehend. But in our view, the key is always whether the government can easily service debt. We think the UK Treasury can. As Exhibit 3 shows, debt interest costs as a percent of tax revenues are about where they were in early 2018, even though the government has added about £1 trillion in debt since then. Here, too, we think inflation played a role. Don’t get us wrong, we think inflation is wretched! For people. Households. Businesses. Normal people. But for governments, we find it is a sneaky blessing, lifting the nominal value of the tax base and therefore tax revenues. In the UK, it also lifted interest payments temporarily tied to the nation’s high levels of inflation-linked debt outstanding. But that didn’t last, and debt is very affordable by historical standards.

Exhibit 3: The UK’s Stealthily Affordable Debt

Source: Office for National Statistics, as of 9/7/2025. Rolling 12-month central government interest payments and revenues, March 1998 – May 2025.

Again, we aren’t weighing in on the politics here. But from a pure economic standpoint, we don’t think the UK needs austerity. Fiscal policy simply follows the whims of OBR forecasts because that is what a past government decided to do, which subsequent governments haven’t seen fit to change. We have seen some point out that it might be suboptimal for fiscal policy to constantly shift to satisfy arbitrary targets. That view has gained some traction in publications we follow lately, and perhaps it will gain further steam. But whatever happens, we wouldn’t read into every interest rate wiggle as a sign it is good or bad for markets. In our view, the sentiment reactions seem quite detached from the UK’s reality of affordable debt.