Fiscal Policy and Public Spending: Navigating New Rules in the UK

Fiscal policy shapes the UK’s economic future, guiding how public funds are spent and taxes levied.

In 2025, new rules under the Charter for Budget Responsibility, approved in January, demand a surplus in the day-to-day budget by 2029/30.

These constraints, described by Prime Minister Keir Starmer as “ironclad,” aim to restore market confidence after years of economic turbulence.

But with inflation hovering at 2.2% and global trade pressures from U.S. tariffs, can these rigid rules deliver stability without stifling growth?

This article explores the UK’s evolving fiscal policy, its impact on public spending, and the delicate balance Chancellor Rachel Reeves must strike.

The stakes are high. Borrowing hit £151.9bn in the year to March 2025, £20.7bn more than the prior year, per the Office for National Statistics.

Public sector net financial liabilities must also fall by 2029/30, a target the Office for Budget Responsibility (OBR) says is met but with slim margins.

These rules, while stabilizing, limit flexibility in an era of rising costs and global uncertainty. From healthcare funding to infrastructure, the government faces tough choices.

This piece dives into the mechanics of fiscal policy, its real-world implications, and whether the UK can navigate these constraints without compromising its long-term prosperity.

The New Fiscal Rules: A Tightrope for Stability

The UK’s fiscal policy is anchored by the Charter for Budget Responsibility, effective since January 2025.

It mandates a surplus in the current budget covering daily expenses like public services and administration by 2029/30.

Public sector net financial liabilities must also decline. The OBR’s March 2025 forecast confirms compliance, but margins are razor-thin, leaving little room for error.

These rules aim to rebuild trust after the 2022 mini-Budget fiasco under Liz Truss, which spooked markets. Yet, critics argue they’re too rigid.

For example, a local council in Birmingham struggled to fund social care due to these constraints, forcing service cuts.

Global trade disruptions, like U.S. tariffs, further strain budgets, potentially requiring emergency spending.

Reeves’ commitment to “non-negotiable” rules signals discipline. But with borrowing overshooting forecasts by £15bn in 2024/25, flexibility is scarce.

The rules allow suspension during economic shocks, but political optics make this tricky. Will Reeves hold firm or adapt to unforeseen pressures?

++ Inflation in the UK: Trends and Government Response in 2025

The OBR warns that a trade war could derail targets, as seen in projections of a 1.1% GDP growth for 2025, down from 1.6%.

Public spending, especially on pay and benefits, drove recent borrowing spikes.

Balancing discipline with responsiveness is the government’s challenge. Fiscal policy must evolve without repeating past mistakes.

Public Spending Under Pressure: Where the Money Goes

Public spending is the lifeblood of UK services, but fiscal policy constraints squeeze priorities. In 2024/25, public sector pay consumed £287bn, roughly 20% of total spending, per the OBR.

Pay rises of 4.75% to 6% were granted, yet unions like the NEU threaten strikes over a 2.8% offer for 2025/26.

Health and education, devolved in England, face tight budgets. The NHS, for instance, struggles with staffing shortages despite increased funding.

Also read: UK Economic Growth Forecasts for 2025: Challenges and Opportunities

A hospital in Manchester recently delayed non-emergency surgeries due to budget limits. Infrastructure, like HS2, also competes for funds, often losing out to immediate needs.

Reeves announced £2bn for 18,000 new social homes in the Spring Statement 2025, a practical step for housing.

But with inflation at 2.2%, costs for materials and labor rise, stretching budgets thin. Fiscal policy must prioritize without neglecting long-term growth.

The government’s cautious approach contrasts with Germany’s €1tn military and infrastructure plan, which eased borrowing rules.

In the UK, such flexibility risks market backlash. A small business owner in Leeds, for example, worries tax hikes could follow spending increases. The government must innovate within constraints.

Global Trade and Tariffs: External Shocks to Fiscal Plans

U.S. tariffs under President Trump disrupt UK fiscal policy. The Bank of England warns of “severe shocks” to global growth, impacting UK exports.

Borrowing rose £15bn above OBR forecasts in 2024/25, partly due to tariff-related economic slowdowns, per the ONS.

Reeves pushes for stronger EU trade ties to offset losses. A £128m deal with India, signed in 2025, shows proactive diplomacy.

Read more: UK Economic Growth Forecasts for 2025: Challenges and Opportunities

Yet, the IMF cut UK growth forecasts to 1.1% for 2025, reflecting tariff pressures. Public spending faces cuts or tax hikes to stay on track.

Imagine fiscal policy as a ship navigating stormy seas tariffs are rogue waves.

A Yorkshire manufacturer, hit by 25% U.S. tariffs, laid off workers, increasing welfare costs.

The government must cushion such blows without breaching fiscal rules. Can it steer steady?

The OBR notes that geoeconomic uncertainty could raise public debt by 4.5% of GDP medium-term. Reeves’ rules allow emergency suspensions, but political fallout looms.

Strengthening trade resilience, like diversifying markets, is critical. Fiscal policy must adapt to global realities.

Rethinking Fiscal Frameworks for the Future

The UK’s fiscal policy prioritizes short-term stability, but long-term prosperity demands bolder vision.

OMFIF and EY advocate for frameworks like intertemporal public sector net worth, balancing debt with future assets. Germany’s €1tn plan exemplifies such ambition.

Current rules focus on debt and budget targets, ignoring aging populations and climate needs.

For instance, flood defenses in Norfolk require urgent investment, yet funds are diverted to immediate services. A broader framework could unlock transformative projects without market panic.

Reeves’ Spring Statement 2025 emphasized fiscal discipline, but critics urge flexibility. The Institute for Fiscal Studies warns that £10bn headroom by 2029/30 is risky.

A tech startup in Bristol, reliant on public grants, fears cuts could stifle innovation. Balance is key.

Technology, like e-invoicing proposed by HMRC, could streamline spending. The U.S. aims for $1tn deficit reduction by 2026, blending cuts with efficiency.

The UK could follow, using data-driven budgeting to optimize fiscal policy. Long-term thinking must guide today’s choices.

The Role of Taxation in Supporting Fiscal Goals

Taxation underpins fiscal policy, funding public services while signaling economic priorities.

In 2024/25, tax revenue surged, yet borrowing still overshot by £15bn, per the ONS. Reeves resists tax hikes, wary of Truss-era market chaos, but pressure mounts.

HMRC’s e-invoicing consultation aims to boost efficiency, potentially increasing revenue.

A café owner in Cardiff benefits from simplified tax tools, saving hours on compliance. But with inflation at 2.2%, households demand relief, complicating fiscal math.

The Spirit Drinks Verification Scheme’s fee cut to £250 per facility shows targeted relief. However, broader tax rises, like on capital gains, could fund spending but risk economic drag.

A freelancer in London fears higher taxes could cut her income. Precision is vital.

The IMF urges fair taxation to rebuild trust. In 2025, 35% of road and train spending benefits the richest 20%, per a thinktank.

Redistributive taxes could align fiscal policy with equity, but political will is needed. Taxation must balance growth and fairness.

Table: Key UK Fiscal Metrics (2024/25)

Metric	Value
Public Sector Borrowing	£151.9bn
Borrowing Overshoot vs. OBR Forecast	£15bn
Public Sector Pay Spending	£287bn
Debt as % of GDP	~100% (early 1960s level)
Inflation Rate	2.2%

Conclusion: Charting a Path Forward

The UK’s fiscal policy is a high-stakes balancing act. With borrowing at £151.9bn and inflation at 2.2%, Reeves’ “ironclad” rules face relentless pressure.

Public spending, from NHS staffing to social housing, demands agility within tight constraints. Global tariffs and a 1.1% growth forecast add urgency.

Yet, opportunities exist e-invoicing, trade deals, and long-term frameworks could transform outcomes.

The government must avoid the Truss-era trap of reckless spending while dodging austerity’s chokehold. Like a tightrope walker, Reeves needs precision and courage.

By blending discipline with innovation, the UK can stabilize finances and invest in prosperity. Will fiscal policy be the anchor for growth or a chain holding it back?

The answer lies in bold, pragmatic choices.

Frequently Asked Questions

What are the UK’s new fiscal rules?
The Charter for Budget Responsibility (January 2025) requires a current budget surplus and falling public sector net financial liabilities by 2029/30.

Why is public spending under pressure?
Rising costs, like £287bn in public sector pay, and global trade shocks limit funds for services like healthcare and infrastructure.

How do U.S. tariffs affect UK fiscal policy?
Tariffs raise costs, slow growth (1.1% in 2025), and increase borrowing, forcing potential spending cuts or tax hikes.

Can the fiscal rules be suspended?
Yes, in economic shocks, but political and market risks make this a last resort for Chancellor Reeves.