Fiscal Illusions Won't Bring the UK Growth — or Security

Bloomberg

10-07-2025

The image of Britain's finance minister in tears during a recent parliamentary debate seemed like an all-too-apt metaphor. Just a year after a resounding electoral victory, the Labour government is beset by anxieties. Markets are wobbling. Public services remain under severe strain, as does the military. Economic growth is tepid.
Worsening all these challenges is a leadership team that seems chronically indecisive.
In a grim sign of the times, polls consistently show Labour trailing Nigel Farage's Reform UK, a populist protest party with no serious governing experience that is now a legitimate contender. The once-dominant Conservative Party has dropped to fourth place. The Labour Party's base, including trade unions, is fracturing.
Meanwhile, the challenges are mounting. The National Health Service faces deep capital and funding gaps. Prisons are overcrowded and underfunded. Labour's signature growth policy — a pledge to build 1.5 million new homes — is well off course. Despite some recent recovery in business investment, the UK still lags its Group of Seven peers. A recent strategic review found that the armed forces were in dire need of new funds.
Instead of addressing such structural weaknesses, Labour has squandered political capital on token savings. An attempt to means-test winter fuel payments (now largely reversed) clawed back pennies while torching goodwill. A disability reform was justified in principle but poorly designed, sparking a rebellion of dozens of MPs; it eventually had to be gutted in order to pass.
Labour argues that these efforts show its commitment to budgetary restraint. Yet its headline fiscal rule — that debt must fall as a share of gross domestic product in the fifth year of every forecast — is little more than an accounting device. The 'fifth year' keeps rolling forward, allowing the chancellor to promise future moderation. A modest £9.9 billion ($13.5 billion) in headroom touted in March has already been eroded by higher gilt yields, slow growth and rising welfare costs.
The result is that Labour is neither convincing markets nor building public confidence. Britain continues to borrow at a premium relative to its peers, while the government's fiscal credibility is dissipating. If the UK wants to fund its health service, rearm its military and invest in long-term growth, among other priorities, small-bore policies of this kind won't do.
With four years left in its term, Labour must be both bolder and more focused. A bigger bet on housing — paired with a planning overhaul, greenbelt reform and stronger incentives for boosting density — would help. So would better-designed welfare reform, with 1 in 10 working-age adults on disability support, an outlier among advanced countries.