Our economic outlook for the United Kingdom
July 23, 2025
Fiscal policy set to tighten further
“With the chancellor of the exchequer’s previous fiscal headroom likely to be wiped out, expect more tax increases in the U.K. autumn budget, which will restrict growth in 2026.”
Shaan Raithatha,
Vanguard Senior Economist
The U.K. chancellor of the exchequer’s previous fiscal headroom (roughly £10 billion) is likely to be wiped out ahead of the autumn budget, driven by policy developments and the Office for Budget Responsibility’s likely downgrades to near-term and trend growth. An intensifying fiscal drag has long been our view and is the primary reason for our below-consensus growth forecast of 0.8% for 2026.
With the labor market and wage inflation showing signs of cooling, we expect services inflation—which has broadly tracked 5% in recent months—to soon follow suit. These developments, coupled with the prospect of fiscal policy being tightened further in the autumn budget and long-term inflation expectations being well anchored, should convince the Bank of England (BoE) that inflationary pressures will subside despite current stickiness.
We continue to expect the BoE to maintain a quarterly cadence of easing. This would put the bank rate at 3.75% at the end of 2025 and at 3.25% by mid-2026. We also expect the BoE to set its next 12-month plan for reducing its gilt holdings at £75 billion in September 2025.
United Kingdom economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December 2025. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
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