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

Once again, the UK’s nonpartisan fiscal watchdog has weighed in on public finances and the economic outlook, calling rising debt a “daunting” risk to stability that will limit the Treasury’s options to respond to “future shocks.” And once again, headlines are jumping on the bandwagon, 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 wealth tax being the center of current conversations. Many noted long-term Gilt yields’ Tuesday rise, arguing it was markets’ confirmation of trouble. (Never mind that yields eased Wednesday.) Yet a quick look at the numbers confirms UK debt is a political problem, not an economic one—and not a probable threat to UK stocks.

Here is what we mean by “political problem.” The reason every Office for Budget Responsibility (OBR) report triggers tax hike hysteria is that, in 1997, when then-Chancellor of the Exchequer Gordon Brown took office, he announced he would adopt a “Golden Rule” for fiscal policy to ensure deficits would stay tame. Parliament formalized this in 1998’s Finance Act, and ever since, governments of both parties have been bound by official forecasts. (Not actual results, forecasts.) 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 repeat OBR-induced freakouts. However, in our view, neither point is true. Long-term forecasts, regardless of who makes them, are fraught with peril. Their baseline assumptions for GDP growth, interest rates, inflation and what have you are based mostly on historical averages and straight-line math. Reality tends to differ from both. They also look at debt solely in nominal terms, overlooking that inflation reduces the relative burden of that debt. Fisher Investments’ founder and Executive Chairman Ken Fisher explained this regarding US debt in a New York Post column. The logic applies in Britain, too.

More broadly, there is no evidence these rules actually erase the budget deficit. Since their adoption, the UK has rarely run a surplus. (Exhibit 1) Instead, what 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 markets performing about as you would expect when its value-heavy sectors weren’t in favor globally, these deficits haven’t been a hindrance to growth or returns. Stocks have spent years telling us UK debt isn’t a problem.

Exhibit 1: Fiscal Rules Don’t Prevent UK Deficits

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

As you would expect, continued deficits mean debt is rising, not just in raw terms but relative to GDP. (Exhibit 2) Hence, the going narrative is that while deficits may not have been such a problem in the past, they will now make markets lose confidence in UK bonds (aka Gilts), causing borrowing costs to skyrocket. 

Exhibit 2: The UK’s Rising Debt

Source: Office for National Statistics, as of 7/9/2025. Central government debt (in pounds and 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. They aren’t. As it happens, they are basically flat year to date and running parallel to US Treasury yields. 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, the amount outstanding is never what really matters. Yes, numbers in the trillions can seem astronomical and hard to wrap your brain around. But the key, always, is whether the government can easily service debt. 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, inflation is wretched! For people. Households. Businesses. Normal folks. But for governments, it is a sneaky friend, lifting the nominal value of the tax base and therefore tax revenues. In the UK, it also lifted interest payments temporarily since there is a lot more inflation-linked debt outstanding there than in the US. 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 7/9/2025. 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, the UK doesn’t appear to need 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. Some have pointed out that it might be suboptimal for fiscal policy to constantly shift to satisfy arbitrary targets. That view has gained some traction 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. The sentiment reactions seem quite detached from the UK’s reality of affordable debt.