Market Analysis

As the UK approaches a general election, it faces a challenging fiscal environment. According to Goldman Sachs, both major parties are committed to reducing debt relative to economic output over the next five years. Achieving this goal will require significant fiscal tightening by the next government.

Goldman Sachs acknowledges the UK's historical success in consolidating finances in response to higher debt levels, suggesting that meeting the necessary primary balance improvement is feasible. 

However, they caution that there is a likelihood of a slightly slower pace of fiscal consolidation than currently planned. This adjustment could be influenced by factors such as the highest tax burden in over seventy years and substantial pressures on healthcare spending.

Even if the planned consolidation proceeds, it may not alone ensure a sustainable trajectory for the debt-to-GDP ratio, particularly if major external shocks like past global financial crises or recent pandemic and energy crises persist. Looking ahead, Goldman Sachs remains cautiously optimistic about the medium-term outlook for UK public finances, noting that the impact of losses from the Asset Purchase Facility is expected to ease in the coming years, potentially facilitating a decline in the debt-to-GDP ratio.

Goldman Sachs also emphasizes that how the government chooses to utilize any fiscal leeway will be crucial in testing its fiscal strategy.

Paraphrasing text from "Reuters" all rights reserved by the original author.