Ahead of the autumn 2024 budget, what’s the state of the UK economy?

The UK economy faces numerous problems, including low productivity, high public debt and wide regional disparities. The new government’s first budget is an opportunity not only to respond to immediate pressures, but also to present a blueprint for a more balanced, inclusive and resilient economy.

As the UK prepares for its autumn 2024 budget, the country’s economic outlook raises critical concerns across several key areas, including the public finances, demographics, growth, productivity and investment.

Persistent fiscal deficits (the gap between annual public spending and annual tax revenues), modest growth, rising public debt, low investment and an ageing population have defined the UK's economic landscape. These challenges also highlight the need for decisive policy action to restore stability.

The budget offers an opportunity to address these challenges while also setting out how the government will promote long-term sustainable growth.

Public finances

Since the global financial crisis of 2007-09, public debt has increased dramatically, and it ballooned as a result of the Covid-19 pandemic.

Over the past four years, the ratio of public debt to GDP has remained close to 100%, the highest since the 1960s, and it has become increasingly unsustainable. The Office for Budget Responsibility (OBR) has issued a stark warning: unless policy reforms are made, the national debt could triple over the next 50 years.

This expected increase is due to a combination of factors, including pressures from the ageing population, the climate crisis and rising geopolitical tensions. Each of these will put pressure on the public purse.

Figure 1: Public debt and deficits as a percentage of GDP

Source: Office for National Statistics (ONS)

These factors suggest that the UK is likely to continue to experience fiscal deficits averaging around 6% of GDP. Managing this fiscal imbalance will require the government to implement policies that not only stabilise debt levels but also foster longer-term economic growth.

One key concern linked to the UK’s rising debt is the potential impact on government bond yields. In 2022, bond yields spiked significantly in response to the Bank of England’s monetary tightening cycle. If the government’s debt continues to climb, a similar scenario where investors demand higher yields to offset perceived risks could occur.

Figure 2: Bond yields

Source: National Institute of Economics and Social Research (NIESR) estimates based on Bank of England data

Higher yields would increase the cost of borrowing for the UK government, creating a loop of rising debt costs and higher interest obligations. In turn, this could further strain public finances and complicate efforts to reduce the debt-to-GDP ratio.

The UK has had persistent fiscal deficits even though tax revenue is at the highest level ever seen in the UK. Further, although still in line with the OECD average, tax revenue in the UK is still low in comparison with countries like France and Germany.

The largest contributors to tax revenues are personal taxes, such as income tax and national insurance, while company tax and business rates provide smaller contributions.

The budget must therefore consider fiscal consolidation measures, those that will enhance tax revenues while reducing deficits and the accumulation of further debt, to prevent the debt burden from becoming even more unsustainable.

Figure 3: Tax revenue as a percentage of GDP

Source: OECD
Note: 90-10 OECD percentiles shaded.

Figure 4: Tax revenue, components

Source: ONS

Government expenditure also stands at its highest level in 40 years, reaching 45% of GDP. A significant proportion of spending is devoted to social protection and healthcare, that together account for almost half of the government expenses.

As the population ages, the demand for healthcare and social services will continue to increase, placing further pressure on the government to fund these essential services. Education, defence, and housing also draw on the government's budget, leaving limited flexibility for new spending initiatives.

Infrastructure projects, crucial for long-term growth, also require sustained investment. Balancing these rising costs with limited revenue growth is increasingly challenging. Therefore, the budget will need to prioritise strategies that curb excessive spending while ensuring adequate funding for critical services and bringing fiscal deficits closer to sustainable levels.

Figure 5: Government expenditure

Source: ONS

Demographics

The population of the UK is ageing – this demographic profile poses substantial economic challenges. With an ageing population, the demand for healthcare and social services is projected to increase significantly, placing further pressure on the public finances.

What’s more, projections of the natural change in the UK’s population suggest that it will start to shrink in the absence of migration.

Figure 6: Birth rate versus immigration

Source: ONS

Addressing these challenges requires innovative policy solutions that would encourage higher workforce participation (and lower rates of economic inactivity among the working age population) and increase the fertility rate. In addition, the budget could introduce incentives aimed at attracting skilled migrants, whose contributions are essential for offsetting the economic strain of an ageing population.

Growth and productivity

The UK's economic growth has lagged significantly since the global financial crisis, primarily due to stagnant productivity levels. Over the past two years, GDP growth has remained below 1%, and after entering a recession at the end of 2023, the country only managed a modest recovery in the first half of 2024. With growth projections remaining subdued, enhancing productivity has become a critical focus area for the budget.

Figure 7: Quarterly GDP growth

Source: ONS

The productivity challenge is not new. Over the past decade, UK productivity growth has averaged just 0.5%, compared with a historical average of around 2%.

There is also significant divergence in productivity levels between UK regions. London and the South East of England have almost double the gross value added (GVA) of the UK average. London has been achieving GVA growth of 1.6%, around 0.3 percentage points ahead of Northern Ireland, Wales and some regions in England such as the West Midlands.

To drive a more balanced and inclusive recovery, the budget should prioritise initiatives that foster productivity in lagging regions.

Figure 8: Productivity

Source: ONS, GDP per hour (Q2 2008 = 100)

Figure 9: Map of UK productivity

Source: ONS, regional GVA per hour

Investment

Growth in investment in the UK has slowed over the past two decades. This decline has been in both public and business investment, leaving the UK lagging behind comparable countries.

As a share of GDP, gross fixed capital formation (GFCF) was only 18% in 2022, below the OECD average of 22%. Investment also varies within regions and between high- and low-productivity regions. London reports double the per capita investment of the regional average. Along with the South East of England, the capital receives almost five times more business research and development (R&D) investment than the North East, Northern Ireland and Wales.

This disparity has contributed to uneven economic growth and it has hindered the potential for innovative businesses to move into underinvested areas. The budget should therefore consider policies that create incentives for business investment across all regions. Incentives for greater investment in human capital, via training and skills improvement, would also be welcome.

Figure 10: Investment (GFCF) as a percentage of GDP

Source: OECD
Note: 90-10 OECD percentiles shaded.

Figure 11: Regional GFCF per capita

Source: ONS

This budget arrives at a critical time for the UK economy. With low productivity, high public debt and wide regional disparities, the budget offers an opportunity to address these challenges and foster a sustainable recovery.

Public finances must be carefully managed to balance fiscal responsibility with targeted investments that support economic growth. Addressing demographic pressures will need workforce-oriented reforms, while stagnant productivity and low investment will benefit from a renewed focus on innovation and regional equality.

The budget should be not only a response to immediate economic pressures, but also a blueprint for a balanced, inclusive and resilient economy.

Where can I find out more?

Analysis of Chancellor Rachel Reeves' Autumn Budget 2024: Articles and analysis from the Institute for Fiscal Studies (IFS).
Labour’s first budget: What might we expect? Article from the National Institute of Economic and Social Research (NIESR).
Great expectations in hard times? Briefing note from the Resolution Foundation.
The websites of the IFS, NIESR and the Resolution Foundation have plenty of pre-budget analysis and commentary – and much more will be added after the budget has been presented to Parliament on Wednesday 30 October. Details of the budget will be on the HM Treasury website.