UK Fiscal Fragility and the Deepening "Doom Loop" in Public Finances

The United Kingdom’s fiscal trajectory since the 2022 Truss-Kwarteng mini-budget crisis has been defined by a paradox: a relentless focus on austerity-driven fiscal rules, even as these very rules have exacerbated long-term growth stagnation and institutional fragility. The “doom loop” of short-term fiscal discipline and underinvestment in productive assets has left the UK economy trapped in a cycle of vulnerability, with public debt at 94% of GDP and a deficit of 5.7% of GDP as of July 2025 [1]. This dynamic is not merely a technical failure but a systemic one, rooted in institutional capture and a misaligned growth strategy that prioritizes political expediency over economic resilience.

Institutional Capture and the Erosion of Fiscal Credibility

The 2022 mini-budget, which promised sweeping tax cuts and deregulation, exposed the fragility of the UK’s fiscal governance. By bypassing the Office for Budget Responsibility (OBR)—the independent body tasked with providing credible economic forecasts—then-Prime Minister Liz Truss undermined the institutional safeguards that stabilize investor confidence [2]. This move reflected a broader pattern of institutional capture, where short-term political goals override long-term fiscal planning. The OBR’s subsequent warnings about the risks of “austerity-driven fiscal rules” underscored how rigid adherence to deficit reduction, without investment in infrastructure or innovation, has stifled growth [3].

Post-Truss reforms, such as the structured forecasting process between the OBR and Treasury, aim to restore credibility. However, these efforts remain constrained by political fragmentation. For instance, Labour’s unfunded spending pledges and Reform UK’s populist economic promises create an environment of uncertainty, eroding the very stability that institutional frameworks seek to enforce [4]. The result is a fiscal policy landscape where technical expertise is sidelined in favor of partisan agendas, deepening the “doom loop” of debt accumulation and weak growth.

Failed Growth Strategies and the Cost of Ideology

Truss’s pro-growth agenda—centered on tax cuts, deregulation, and localized low-tax zones—was criticized for its lack of coherence and structural relevance. The decision to cut the top income tax rate, for example, was framed as a pro-growth measure but alienated both the public and economic experts amid rising inflation and energy costs [5]. Similarly, the proposal for localized tax zones risked creating market distortions rather than fostering national productivity [6]. These strategies, driven by ideological conviction rather than empirical evidence, failed to address critical challenges such as post-Brexit trade frictions and the sluggish post-pandemic recovery.

The fallout was immediate and severe. The mini-budget triggered a collapse in bond markets, forcing a rapid reversal of policies and a government reshuffle. Truss’s resignation in October 2022 marked the shortest tenure of any modern British prime minister, a testament to the political and economic costs of misaligned priorities [7]. Yet the damage extended beyond her tenure. The episode exposed a systemic inability to balance fiscal prudence with growth-oriented investment, leaving the UK with a public finance framework that prioritizes short-term stability over long-term resilience.

The Path Forward: Breaking the Doom Loop

To escape this cycle, the UK must adopt a fiscal strategy that prioritizes investment in productive assets—such as clean energy infrastructure and digital transformation—while recalibrating fiscal rules to allow for cyclical flexibility [8]. The OBR’s July 2025 report emphasizes the need for sustained growth to ensure debt sustainability, yet current policies remain constrained by short-term fiscal targets [1]. A shift toward a “current balance rule” (focusing on revenue and non-interest spending) and a three-year rule horizon, as recommended by the IMF, could provide the necessary predictability to attract long-term investment [9].

For investors, the implications are clear: the UK’s fiscal fragility creates both risks and opportunities. While high debt levels and political uncertainty pose challenges, the potential for policy reform—particularly in infrastructure and green technology—offers avenues for growth. However, such opportunities will only materialize if policymakers break free from the institutional capture that has defined recent governance and embrace a more holistic, evidence-based approach to fiscal strategy.

Source:
[1] Fiscal risks and sustainability – July 2025, [https://obr.uk/frs/fiscal-risks-and-sustainability-july-2025/]
[2] The UK's fiscal adjustment is at risk of failure, [https://www.oxfordeconomics.com/resource/the-uks-fiscal-adjustment-is-at-risk-of-failure/]
[3] Unleashing growth in the UK: time to break the fiscal chains, [https://www.lse.ac.uk/granthaminstitute/news/unleashing-growth-in-the-uk-time-to-break-the-fiscal-chains/]
[4] UK Fiscal Policy Turnaround: Testing the Waters of Stability ..., [https://www.ainvest.com/news/uk-fiscal-policy-turnaround-testing-waters-stability-2506/]
[5] Eleven gambles that went wrong for Liz Truss, [https://www.bbc.com/news/uk-63838387]
[6] Liz Truss risks spectacular failure with her “pro-growth” gamble, [https://www.newstatesman.com/comment/2022/09/liz-truss-uk-pro-growth-strategy]
[7] The resignation of Liz Truss, explained, [https://theweek.com/united-kingdom/1017176/has-truss-already-failed]
[8] Staff Concluding Statement of the 2025 Article IV Mission, [https://www.imf.org/en/News/Articles/2025/05/27/cs-uk-aiv-2025]