UK Fiscal Resilience Post-Brexit: Navigating Political Accountability and Economic Misdiagnosis

The UK's post-Brexit fiscal landscape has been a study in contradictions. On one hand, the economy has shown surprising resilience, with GDP growth rebounding to 0.7% in Q1 2025 and the IMF upgrading its 2025 forecast to 1.2%, according to an Equiti analysis. On the other, the structural damage from Brexit-reduced productivity, fragmented trade relationships, and a weakened political accountability framework-has left investors grappling with a paradox: a seemingly stable economy underpinned by fragile institutions.

Economic Misdiagnosis: The Long Shadow of Brexit

The UK's economic trajectory since 2020 has been shaped by a series of miscalculations. The Office for Budget Responsibility (OBR) estimates that Brexit has reduced long-run productivity by 4% due to non-tariff barriers with the EU, while trade volumes with the bloc are 15% lower than they would have been under continued EU membership, according to the OBR analysis. New trade deals with Australia and Japan, once hailed as silver linings, have contributed a mere 0.1% GDP boost over 15 years, a figure the RSM UK outlook estimates. These figures underscore a critical misdiagnosis: the UK's economic model was not prepared for the reality of operating outside the EU's single market.

Compounding this are structural vulnerabilities. The Institute for Fiscal Studies (IFS) warns that weak productivity growth and high public debt levels-coupled with external financing gaps-pose long-term risks in an IFS report. Meanwhile, the UK's borrowing costs remain the highest among OECD advanced economies, a reflection of market skepticism about fiscal sustainability, according to the OECD survey.

Political Accountability: The Erosion of Democratic Safeguards

Brexit has not only reshaped the UK's economic framework but also its political architecture. The Westminster model, already characterized by strong executive dominance, has seen further centralization of power. A 2025 study by the University of Stirling highlights "democratic backsliding" through measures such as weakened Freedom of Information laws and restrictive voter ID requirements, which critics argue undermine transparency and individual liberties, as discussed in the OECD survey.

The erosion of checks and balances is particularly concerning for investors. The UK ranks 16th in vertical accountability, a mid-tier position that masks growing vulnerabilities. For instance, the 2025 local government reorganisation (LGR) aims to streamline governance but has been mired in delays and political infighting, exemplified by Angela Rayner's abrupt resignation as housing secretary, a development noted in the RSM UK outlook. These developments raise questions about the government's ability to implement coherent fiscal policies.

Fiscal Resilience: A Delicate Balancing Act

Despite these challenges, the UK has managed to avoid a fiscal crisis. The Autumn Budget 2025, led by Chancellor Rachel Reeves, plans to raise £20bn in additional revenue to address fiscal headroom reductions caused by policy U-turns and higher gilt yields, according to the RSM UK outlook. The Bank of England's expansionary monetary policy, including anticipated interest rate cuts, is another stabilizing factor, though inflation remains stubbornly above target, as noted in the Equiti analysis.

However, resilience is not synonymous with robustness. The OECD notes that growth is "supported by real wage increases and private consumption but constrained by elevated inflation and weak productivity." This suggests a reliance on short-term fixes rather than structural reforms. For investors, the risk lies in the UK's limited policy space: high debt levels and external financing gaps leave little room for error in future fiscal maneuvers, a concern highlighted in the IFS report.

Investment Implications: Caution Amidst Resilience

For investors, the UK presents a mixed picture. The economy's ability to grow in 2025, despite Brexit's legacy, is a positive signal. Yet, the erosion of political accountability and structural fiscal vulnerabilities demand caution. Key risks include:
1. Policy Uncertainty: The government's "illiberal playbook" of weakening democratic institutions could deter foreign direct investment, as discussed in the OECD survey.
2. Fiscal Sustainability: High borrowing costs and debt levels may lead to a downgrade in credit ratings, increasing capital costs for businesses.
3. Productivity Lags: Without significant reforms, the 4% productivity drag from Brexit could persist, limiting long-term growth.

In contrast, opportunities exist in sectors benefiting from fiscal consolidation efforts, such as infrastructure and green energy. The 2025 Spending Review's emphasis on efficiency and fiscal sustainability, though vague, hints at potential for targeted investments, a point the OBR analysis raises.

Conclusion

The UK's post-Brexit fiscal resilience is a testament to its adaptive capacity, but it is built on shaky foundations. Political accountability mechanisms, already weakened by Brexit, face further strain from executive overreach. Economically, the country remains vulnerable to structural headwinds that could undermine its recent growth. For investors, the lesson is clear: resilience is not a substitute for reform. The UK's fiscal future will depend on its ability to address these dual challenges-or risk repeating the misdiagnoses of the past.