UK fiscal challenges and budget priorities

Ahead of the June 11 spending review, the UK government is facing serious fiscal challenges – increasing budget pressure, rising bond yields and the risk of an economic slowdown. In the autumn, the Chancellor plans to announce new fiscal consolidation measures to comply with financial regulations. 

A possible easing of the Bank of England's policy and a reduction in quantitative tightening or a change in the maturity of government bonds is expected, which may reduce the burden on the market.

However, the deterioration in average growth due to weak productivity, lower migration and the introduction of US tariffs reduces the financial reserve of the state. The spending review will set budgets for departments for the future, and austerity could lead to cuts for vulnerable departments, especially amid rising health and defense costs.

If forecasts worsen, it will be more difficult for the chancellor to cut spending, which may increase the risk of tax increases. The spending review is becoming key to market confidence, as there will be no updated forecasts from the Office for Budget Responsibility in June. It is expected that the Debt Management Department will compensate for overexpenditures through additional sales of Treasury bills, and in case of shortage, it will reduce the share of long-term liabilities. The perception of British debt instruments is improving, especially in terms of long-term real returns.