United Kingdom: Rebuilding fiscal space amid rising spending pressures

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Rising spending demands from population ageing, healthcare, the climate transition and defence are placing growing pressure on the UK’s public finances. Rebuilding fiscal space will require a combination of fiscal discipline and structural reforms that strengthen growth and support fiscal sustainability.

Nicolas Gonne and Daniela Glocker, OECD Economics Department

Fiscal pressures are rising despite a more stable economy

The UK economy has shown resilience in the face of successive shocks. Inflation has fallen markedly from its peak, real incomes are recovering and activity has stabilised. Yet growth remains modest and fiscal pressures are mounting. Renewed geopolitical tensions, higher energy prices and persistent global uncertainty continue to weigh on growth prospects, while weak productivity growth remains a longstanding constraint on living standards (Figure 1).

Stronger growth is essential not only for raising living standards but also for supporting the public finances. Public debt exceeds 100% of GDP, interest payments remain elevated and long-term spending pressures are set to increase. Recognising these challenges, the government’s Growth Mission seeks to tackle long-standing barriers to productivity through reforms to investment, planning, infrastructure, skills and labour supply. As demands on public resources grow, strengthening the economy’s underlying growth potential has become more important than ever.

Rebuilding fiscal space through more efficient taxation and spending

However, higher GDP growth alone will not be enough to rebuild fiscal space. Fiscal discipline and reform need to go hand in hand. Restoring fiscal buffers requires maintaining sound public finances while strengthening the economy’s growth potential.

On the spending side, rebuilding fiscal space will require careful prioritisation. With taxes already at historically high levels, fiscal consolidation will need to rely primarily on expenditure measures. However, this should not come at the expense of productive public investment, which remains essential for long-term growth. Rather than relying on across-the-board spending cuts, efforts to improve efficiency should be targeted to areas where there is genuine scope for productivity gains, taking account of past efficiency savings and changes in departmental responsibilities. As spending pressures rise, ensuring that public resources deliver value for money will become increasingly important.

Recent experience with energy support measures illustrates the importance of policy design. Across many OECD countries, broad-based support measures helped cushion the 2022-2023 energy shock, but often came at a high fiscal cost and were not always well targeted. The United Kingdom has since shifted towards more targeted measures that better protect vulnerable households while containing fiscal costs. This approach helps preserve fiscal space and strengthens the capacity to respond to future shocks.

There is also scope to improve the efficiency of the tax system. Tax expenditures, including exemptions, reliefs and preferential treatments, are relatively large (Figure 2) and can narrow the tax base while creating economic distortions. While many pursue legitimate policy objectives and can play an important role in supporting households, businesses or specific activities, they are often subject to less regular scrutiny than direct spending programmes despite carrying similar fiscal costs. A systematic review of these provisions, combined with continued efforts to strengthen tax administration and compliance, could help ensure that they remain well targeted and deliver value for money. Where tax expenditures no longer achieve their intended objectives, reforming or phasing them out could broaden the tax base, reduce distortions and support fiscal sustainability.

From stabilisation to sustainability

The UK economy has regained stability after a series of shocks. The next challenge is to rebuild fiscal space to cope with rising pressures from ageing, healthcare, the climate transition and defence spending.

This will require more than fiscal discipline alone. The 2026 OECD Economic Survey of the United Kingdom argues that fiscal and structural reforms need to go hand in hand. Reforms that strengthen productivity, investment and labour supply can support growth and broaden the tax base, while better targeting of spending and tax provisions can improve fiscal sustainability. Together, these reforms can help rebuild fiscal space, strengthen the resilience of the public finances and ensure that the UK is better prepared for future economic and fiscal challenges.

References

OECD (2026), OECD Economic Surveys: United Kingdom 2026, OECD Publishing, Paris, https://doi.org/10.1787/aa997c6e-en.