United Kingdom

The UK scores poorly in terms of public and external balances. The gross public debt-to-GDP ratio now stands at around 100%, versus 85% in 2019 before the Covid-19 crisis. The previous and current Labour governments have committed to strong fiscal discipline, but most of the fiscal tightening plans are set to take effect after 2027, which undermine their credibility. Furthermore, the new government under Andy Burnham has yet to outline its fiscal plans in more detail, notably on the revenue and spending savings side to fund new spending commitments. As a result, financial markets are watching closely for any signs of fiscal slippage or fading fiscal discipline. This keeps borrowing costs elevated for both the public sector and the private sector, particularly mortgage rates. 

On the external front, the UK continues to display structural vulnerabilities. It has run a sizeable current account deficit for many years as strong services exports only partly offset a persistent goods trade deficit. While Brexit continues to weigh on trade with the EU through higher non-tariff barriers, the 2025 UK-EU reset—including a planned sanitary and phytosanitary agreement and closer regulatory cooperation in selected areas—should gradually reduce frictions, particularly for agrifood trade. More broadly, weak productivity growth, subdued business investment and relatively poor export performance remain key constraints on improving the UK's external fundamentals.

The change in Labour leadership following Keir Starmer's resignation has reduced short-term political uncertainty. Prime Minister Andy Burnham has sought to unite different factions within the Labour Party, lowering the risk of internal parliamentary rebellions that had increasingly constrained policymaking under his predecessor. Labour's large parliamentary majority and the party's recovery in opinion polls also make an early general election unlikely. Looking ahead, political risks are more likely to stem from the government's policy orientation than from political instability. Burnham is expected to place greater emphasis on regional development, industrial policy and devolution while maintaining a broadly pro-growth agenda. However, a gradual shift towards a more expansionary fiscal stance could increase market scrutiny of the UK's public finances, making the preservation of fiscal credibility an important policy challenge.