Even with UK bond yields touching multi-decade highs and investors demanding steeper interest, Britain still earned a nod. IMF Chief Economist Silvana Tenreyro called the UK the "country that basically stands out" for charting a route to bring borrowing down, and she urged Chancellor of the Exchequer John Healey to "stay the course" with the plans already in motion. In its latest World Economic Outlook, the IMF expects the deficit to be 3.8% of GDP this year and to decline to 1.4% by 2031 - the biggest improvement in the G7. The figures cover combined borrowing by central and local government.
Here is the twist: despite pricier borrowing, the overall debt load has been steadier than many assumed after the pandemic. In August, net debt stood at 93.8% of GDP - a touch lower than at the point Labour assumed power in mid-2024 and beneath the Covid-era peak above 98%. Back in autumn 2022 and spring 2023, the Office for Budget Responsibility thought debt would still be around 100% by now and heading lower. Revisions that upgraded past growth have helped, and so has inflation, which lifts nominal tax receipts and boosts nominal GDP. Stephen Millard, the National Institute of Economic and Social Research's deputy director, put it this way: "Higher inflation reduces the real value of government debt while also increasing tax revenue in nominal terms and, so, reducing the deficit in nominal terms."
Deficit reduction is judged relative to peers, not in isolation. Market Briefs covers fiscal policy free every weekday.
That helpful mix did not always translate into restraint. Andrew Wishart, UK economist at Berenberg, said stronger tax takes have "generally failed to translate into a narrower deficit as various administrations spent the windfall." According to him, Conservative chancellor Jeremy Hunt's tax cuts, coupled with higher spending under Rachel Reeves, Healey's Labour predecessor, contributed to that outcome. By now, the OBR had expected debt to be moving down.
Instead, the outlook is softer. Andrew Goodwin, Oxford Economics' chief UK economist, said: "Now the expectation is that debt will rise further before flattening off," calling it "largely because successive government have opted to scale back planned tightening." The IMF's baseline has gross debt at 102% of GDP this year, nudging up to 102.5% in 2027, then easing to 100.2% in 2031, which would be the second lowest in the G7 after Germany.
Healey heads into his first budget later this month with a debt level that is lower than many once feared and a deficit path the IMF openly likes. That combination shapes what room there is for tax and spending choices and how global investors feel about Britain's direction. For savers and mortgage holders, it all feeds into the policies that touch taxes, public services and the day-to-day economic climate you live in.
Praise from the IMF and high yields can coexist uncomfortably. Join Market Briefs free and follow it.
