But illusions don’t last forever

Damian Pudner has a useful CAPX reminder of the dire state of UK fiscal sustainability.

Britain’s fiscal fantasy is over – and time is running out

• Investors are beginning to rethink Britain’s long-term fiscal sustainability
• We don’t need higher taxes. We need a better state
• Rachel Reeves' Autumn Budget will be a moment of truth

It will begin, as financial crises so often do, not with a bang, but a murmur.

A failed gilt auction. A modest rise in yields. A subtle but persistent shift in investor sentiment. No panic, no headlines – just the quiet sound of markets beginning to lose faith.

For years, Britain has indulged in a fiscal illusion. Ministers promised what they couldn’t afford. Civil servants massaged the assumptions. The Bank of England quietly underwrote it all. Cheap money, the legacy of interest rates held too low for too long, enabled bad habits. And for a while, the bond market played along.

But illusions don’t last forever. And now, the spell is breaking.

A familiar illusion but the whole piece is well worth reading as a reminder that this one is finally coming up against the real world.    

Public spending is now above 44% of GDP, the highest on peacetime record, and equivalent to around £45,000 per household. The tax burden is at a 70-year high. Productivity across public services remains stagnant at best. Reeves has ruled out increases to income tax, VAT or National Insurance. But not stealth taxes. Fiscal drag – the silent squeeze of frozen thresholds – is expected to raise £44.6bn by 2028, according to the OBR, most of it from middle earners.