Malcolm Wheatley
Broke Britain: what it means for investors
The Office for Budget Responsibility’s latest fiscal risks report makes for bleak reading – and investors shouldn’t ignore it.
Higher gilt yields beckon, along with higher taxes.
The argument for overseas investing has grown stronger – despite the government’s protestations that it wants to see more people invest in UK shares.
Wednesday, 16th July 2025
Dear Fellow Fools,
Macroeconomics is a dry subject. With two degrees in economics – or three, depending on how you’re counting – I can truthfully say that macroeconomics is the branch of economics that I liked least.
But sometimes, even the driest subject comes alive. And right now, we’re unfortunate enough to be living in a macroeconomic experiment which is making for very interesting times indeed.
All of which I mention because what’s going on has a direct impact on all of us as investors.
Bleak assessment
July 8 saw the publication of the Office for Budget Responsibility’s latest fiscal risks report. It didn’t pull any punches
The general thrust (and here I’m quoting pretty much verbatim from the report):
- The UK’s public finances have emerged from a series of major global economic shocks in a relatively vulnerable position.
- The UK now has the sixth highest debt, fifth highest budget deficit, and the third highest borrowing costs among 36 advanced economies.
- Efforts to put the UK’s public finances on a more sustainable footing have met with only limited and temporary success in recent years.
- The result has been a substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances.
- Against this more challenging domestic and global backdrop, the scale and array of risks to the UK fiscal outlook remains daunting.
How we got here
Now, bodies such as the Office for Budget Responsibility don’t use words like ‘daunting’ and ‘vulnerable’ lightly. Nor does it lightly warn of ‘a substantial erosion of the UK’s capacity to respond to future shocks’. This is serious stuff.
George Osborne’s and David Cameron’s era of austerity was unpopular. But it did keep a fairly tight rein on the public finances. And successive governments since have failed to replicate anything like that. Public sector debt has ballooned.
And the present government – which is of a very different political hue, remember – so far appears to be keeping even less of a grip on the public finances. It talks tough, but caves when pressed.
Look at the facts. It has foresworn tax rises. Made massive new spending commitments in areas such as defense and healthcare. Failed to get much-needed spending cuts through parliament, as we saw with the latest welfare climbdown, and the climbdown over the Winter Fuel Allowance. And refused to tackle expensive liabilities such as the so-called ‘triple lock’ on the state pension.
To stress, I’m not making a political point here, but an economic one. Once, the government might have hoped for GDP growth or improvements in productivity to help it out of its hole. But productivity growth is anaemic, and economic growth has been negative for the last two quarters – and this with a government that placed economic growth at the top of its priorities.
Things simply don’t add up.
Threats and opportunities
So where are we heading? And what does it mean for investors? Here’s my take on it.
First, the already-nervous bond market is going to become even more nervous, unless things change – which, as the Office for Budget Responsibility points out, they’ve shown no sign of doing. Worse, the Office for Budget Responsibility is forecasting that pension funds will sharply reduce their gilt holdings in the years ahead, and so gilt yields will have to rise in order to entice foreigners to hold them. UK long-term gilt yields are already higher than they’ve been in the last 25 years, but expect them to climb higher.
That’s good news for income investors, of course, but it also raises the cost of the government’s debt interest. And to the extent that gilt rates drive interest rates in the broader economy, things don’t auger well for business sectors that do best in low interest rate environments. Which is quite a chunk of the economy, when you think about it.
But other countries – and other economies – may, and probably will, have different interest rate environments, and very different GDP growth and productivity environments. Right now, UK shares are cheap on a price-earnings basis, but overseas shares may offer better growth prospects. Not to mention better relative asset prices, going forward, if sterling depreciates. Should you buy UK – or look elsewhere? It’s a very valid question. The government has a view – but isn’t delivering the economic backdrop to support it.
What about taxes? Well, the Labour party campaigned on a pledge not to raise taxes for working people, and Rachel Reeves stated firmly in the autumn that there would be no more tax rises. But how about imposing a tax that doesn’t already exist? Hence the talk of a wealth tax. It won’t be politically popular – but relatively few voters will be affected, unlike continuing the present freeze on tax thresholds.
Raising Capital Gains Tax rates is a distinct possibility, too. Unpopular again, but only with relatively fewer voters – and critically, arguably not ostensibly raising taxes for ‘working people’.
What to do in such a taxation regime? ISAs and pensions offer some relief, and you could always move abroad – as, apparently, people are. But talk to advisers to the wealthy, and you’ll also hear plenty of talk of trusts, family investment companies, gifting assets early to beat inheritance tax, and tax shelters such as Venture Capital Trusts. Sangria in the sun sounds attractive it, but there are alternatives.
We have been warned
So there we have it. I’m aware that this is a Collective column that is a little out of the ordinary, but so too was the report from the Office for Budget Responsibility. And so too, it must be said, is the state of the nation’s finances.
Again, to stress, I’m not making a political point here, but an economic one – and the assessment isn’t mine, but that of the Office for Budget Responsibility.
But the takeaway is clear: hard times, and tough choices, lie ahead. And building wealth – and, critically, keeping hold of it – has rarely been more important.
Until next time,
Malcolm Wheatley
Investing Columnist,
The Motley Fool UK
