14th October 2026
Britain is forecast to make the biggest reduction in its budget deficit among the G7 economies. But with government borrowing costs rising and living standards under pressure, the good news comes with important qualifications.
Britain’s public finances have received an unexpectedly encouraging assessment from the International Monetary Fund (IMF). At a time when governments across the world are struggling with rising debt, higher interest rates and competing demands for public spending, the IMF believes the UK is making progress in reducing its budget deficit and does not need to accelerate its existing programme of financial restraint.
That is a welcome message for Chancellor John Healey as he prepares his Budget on 28 October. But it is not a declaration that Britain’s financial problems have been solved. The country continues to face substantial borrowing costs, pressure on public services and difficult choices over taxation and spending.
How Britain compares with the other G7 countries
The most striking finding comes from an analysis of the IMF’s latest economic forecasts by the Resolution Foundation, a research organisation specialising in living standards and economic policy.
Its analysis suggests that the UK is on course to achieve the largest reduction in its government deficit as a share of national income among the G7 countries. The IMF forecasts that Britain’s deficit could fall to around 1.4% of gross domestic product (GDP) by 2031.
That would represent a substantial improvement from the 4.4% deficit recorded in the previous financial year.
The distinction matters. A deficit is the amount by which government spending exceeds its income over a period, usually a year. Reducing it means the Government needs to borrow less than before. It does not necessarily mean the country’s overall debt is falling in cash terms.
Nor does the forecast mean Britain already has the smallest deficit in the G7. It means the UK is expected to make the largest improvement over the period covered by the forecast.
The IMF has also upgraded its forecast for UK economic growth in 2026 to 1.3%. That is a more positive assessment than earlier projections, although growth is still modest and the outlook for 2027 is less encouraging.
The Resolution Foundation points out, however, that Britain performs much less well when the comparison turns to growth in GDP per person, a measure more closely connected to living standards. A country can produce more overall without individual households necessarily feeling better off.
Sources: Resolution Foundation analysis of the IMF forecasts and The Guardian’s report on the IMF outlook.
The IMF’s message: stay the course
The IMF’s latest comments are particularly significant because they reject the argument that Britain must immediately impose even more severe measures to reduce borrowing.
Rodrigo Valdés, the IMF’s director of fiscal affairs, said the recommendation was to “stay the course”, rather than accelerate the pace of deficit reduction. The organisation has recognised the action already taken by the UK Government and the need to balance financial discipline with economic and social pressures.
The Government’s target is to ensure that day-to-day public spending is covered by tax revenue by the 2029/30 financial year. In practical terms, that means it intends to stop borrowing to pay for routine running costs, although borrowing for investment may continue.
Meeting that target will not be easy. Public services face competing demands, while defence, welfare and the cost of servicing existing debt are all placing pressure on the Treasury.
The IMF has also warned more generally that governments cannot ignore rising debt and interest costs indefinitely. Its message is not that deficits no longer matter, but that Britain should continue with a credible plan rather than rush into additional cuts simply to improve the figures more quickly.
Read the Reuters report on the IMF’s latest advice.
So why is Britain paying so much to borrow?
This is where the story becomes more complicated.
Despite the improved outlook for its deficit, Britain has recently faced government borrowing costs at their highest levels since 1998. Investors are demanding relatively high returns to lend money to the UK, adding to the cost of financing the national debt.
Part of the explanation lies in the sheer scale of government debt and the amount that must be refinanced as existing borrowing matures. When interest rates rise, new borrowing and the replacement of older debt can become more expensive.
There is also a question of confidence. The financial turmoil following the 2022 mini-budget under Liz Truss left investors particularly alert to the risks of British fiscal policy. Governments must convince markets not only that their plans look credible on paper, but that they will actually deliver them.
Higher borrowing costs can become a vicious circle. The Government pays more interest on its debt, leaving less money available for public services or investment. It may then need to raise taxes, restrain spending or borrow more, potentially adding to economic pressure.
Britain’s improving deficit forecast is therefore encouraging, but it does not automatically translate into cheaper borrowing.
The IMF has warned that rising bond yields are creating a wider challenge for advanced economies, with debt interest bills threatening to restrict governments’ freedom to respond to future emergencies.
Read the IMF’s wider warning on government debt and borrowing costs.
The Budget will test the Government’s credibility
The timing of the IMF’s assessment is important. The Chancellor’s Budget on 28 October will have to address the gap between what the Government wants to achieve and what it can afford.
There are demands for more money for defence, welfare and public services, alongside pressure to help households facing higher energy costs. Yet raising taxes further could affect households and businesses, while spending cuts could deepen difficulties in already stretched services.
The Government has limited room for manoeuvre. Tax revenues already account for a historically high share of national income, and higher interest payments risk eating into the money available for other priorities.
The IMF’s advice gives the Chancellor some support for sticking with the existing approach. But the Government will still have to show that its spending plans, revenue forecasts and targets are realistic.
There is a difference between announcing a financial target and achieving it. Previous governments have repeatedly set fiscal rules that later had to be adjusted when economic conditions changed.
The latest forecasts could also be affected by developments outside the Government’s control. Higher energy prices, international conflict, weaker growth or further increases in borrowing costs could all make the calculations more difficult.
What does this mean for Scotland?
For Scotland, the consequences are not confined to Westminster or the financial markets.
The Scottish Government depends heavily on funding arrangements linked to the UK Government’s spending decisions. If higher debt interest costs or weak growth leave the Treasury with less room to increase spending, that can limit the scope for additional funding for Scottish public services and investment.
Local authorities, the NHS, colleges and other public bodies are already trying to manage rising costs against tight budgets. Any squeeze on public spending can affect staffing, services and investment in local economies.
For places such as Caithness and Sutherland, where public services and public-sector employment are important parts of the local economy, the implications can be particularly significant. A national decision to restrain spending may eventually be felt through council budgets, health services, transport provision or the support available for economic development.
There is a balance to be struck. Borrowing indefinitely to cover routine expenditure is not sustainable, but cutting investment that could improve productivity, create jobs or strengthen local economies can also carry a long-term cost.
The question is not simply whether government spending should rise or fall. It is whether the money available is being used effectively and whether spending decisions deliver lasting benefits.
A better deficit does not necessarily mean better living standards
The IMF’s assessment should be welcomed, but it needs to be kept in perspective.
Britain appears to be making progress in reducing its deficit compared with its G7 peers. The IMF is also more optimistic about UK growth this year than it was earlier in 2026. Those are positive developments.
However, the Resolution Foundation’s analysis highlights a less encouraging side of the picture: Britain is forecast to perform poorly among G7 countries on growth in GDP per person. That matters because people judge the economy by their wages, household bills, job prospects and the services they rely on, rather than by the national deficit alone.
A government can improve its accounts while households continue to struggle. Equally, failing to control borrowing can eventually make matters worse by increasing interest costs and reducing the money available for public priorities.
The real challenge is to achieve both financial stability and an improvement in living standards.
The verdict
The IMF has given Britain a measure of reassurance. It believes the country is making relatively good progress on deficit reduction and does not need to accelerate its current programme of fiscal restraint.
But this is not an all-clear. Britain still faces high borrowing costs, substantial debt, pressure on public services and modest prospects for growth per person.
The forthcoming Budget will show whether the Government can maintain the confidence of financial markets while addressing the needs of households, businesses and public services.
For now, the message is cautiously encouraging: Britain’s finances may be moving in the right direction compared with other major economies. The harder task is ensuring that this improvement translates into something people can feel in their everyday lives.
IMF World Econoic Reports