The UK’s fiscal position in international context

The UK’s fiscal position is increasingly vulnerable, by both historical and international standards, limiting the scope to respond to future economic and other shocks. While most advanced economies have seen their deficits and debt increase since the pandemic, the UK stands out for running persistent large deficits and a relatively high debt stock in the face of rising interest rates, slowing growth, an ageing population, and rising geopolitical and trade tensions.

Since 2020, the UK, like all other advanced economies, has faced two large shocks from the pandemic and the subsequent energy crisis precipitated by the Russian invasion of Ukraine. The impact of these shocks on the economy, combined with the Government’s policy response to them, pushed up borrowing to 15 per cent of GDP and raised public sector net debt to 97 per cent of GDP during the pandemic in 2020-21. Borrowing has subsequently remained well above pre-pandemic levels, at around 5 per cent of GDP over the past four years, and debt has remained just over 95 per cent of GDP. The simultaneous rise in global interest rates to their highest level in 15 years, coupled with persistently sluggish economic growth, has made the task of reducing the deficit and reversing this rise in debt significantly more challenging.

Comparisons with other advanced economies highlight the UK’s relatively vulnerable fiscal position in the aftermath of these shocks. At the height of the pandemic, the UK had the second-largest deficit of any advanced economy, and it has struggled to reduce its borrowing back below pre-pandemic levels (Chart A). In 2024, the UK had the third-highest deficit among European countries, and the fifth-highest among 36 advanced economies, surpassed only by the US, France, Slovakia and Israel (Chart B). And with its 10-year bond yielding 4.5 per cent as of June 2025, the UK Government faces the third-highest borrowing costs of any advanced economy after New Zealand and Iceland.

Chart A: Government borrowing in advanced economies since 2016

Chart B: Government borrowing in advanced economies in 2024

The UK has also experienced one of the largest increases in indebtedness since the pandemic. On an internationally comparable measure, UK general government net debt rose by 17.9 per cent of GDP between 2019 and 2024, while the average advanced economy had a net debt-to-GDP ratio only 0.7 per cent of GDP higher than in 2019 (Chart C). As a result, by the end of 2024, the UK had the fifth-highest net debt-to-GDP ratio among the 33 advanced economies for which consistent data is held.

Chart C: Government net debt in advanced economies since 2016

Although other advanced economies face similar pressures on their public finances, four factors contribute to the UK’s fiscal position being particularly challenging:

• Scale of crisis response. The UK’s fiscal support during the pandemic and energy crisis was among the largest across advanced economies, with borrowing in 2020-21 reaching 12.4 per cent of GDP higher than 2019-20 and pandemic-related support measures totalling over £300 billion. While this may have mitigated deeper economic scarring, it left the UK with a higher starting level of debt and less fiscal space to deal with future shocks.
• Persistent deficits. The UK has not significantly reduced its level of borrowing and debt since the peak of the pandemic, unlike other advanced economies such as Germany, Italy, the Netherlands, Portugal, or Spain. The persistent gap between spending and revenue leaves the UK less resilient than other advanced economies to new shocks when they inevitably arise.
• Slower economic growth. The UK’s economic growth since the pandemic has lagged both its own pre-pandemic trend and similar advanced economies. Between 2022-23 and 2024-25, real GDP growth in the UK has averaged 1.3 per cent a year, compared to 2.5 per cent between 2001-02 and 2007-08. Slower economic growth constrains tax receipts but does not commensurately reduce spending pressures, increasing the risk that debt will continue to rise relative to GDP even without further shocks.
• Higher interest rates. The UK faces higher interest rates on its public debt than the euro area or the US. The divergence in interest rates could be explained by more persistent domestic inflation, higher debt issuance, and a shallower domestic market. Although Bank Rate has started to fall since the peak reached shortly after the 2023 FRS, interest rates for longer-dated gilts have remained higher, meaning the UK faces a relatively high marginal cost of issuing and refinancing its gilts, both compared to the past and compared to other countries.

These final two factors taken together make it more difficult to stabilise the debt-to-GDP ratio in the UK than in the past and relative to other advanced economies. With the effective interest rate on government debt (r) now exceeding the economy’s likely nominal growth rate (g), the debts-tabilising level of the primary surplus (receipts minus non-interest spending) in the final year of our latest forecast was +1.3 per cent of GDP. This is 3.1 percentage points higher than the -1.8 per cent of GDP primary deficit that would have stabilised the debt-to-GDP ratio in 2018-19, and has remained at the elevated level in OBR forecasts since November 2023.