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In July 2025, the UK faces a critical juncture as fiscal pressures and emerging financial risks threaten economic growth and market stability. On 16 July 2025, the Prime Minister’s refusal to rule out pension tax changes at the Autumn Budget, despite warnings from the Office for Budget Responsibility (OBR) about the stifling effects of higher taxes, has sparked intense debate.
The OBR’s chief cautioned that the UK’s tax burden, nearing an all-time high, could undermine growth, while City analysts estimate a £24–30 billion revenue shortfall over the next five years. Concurrently, the Financial Conduct Authority (FCA) chief executive highlighted rising sovereign debt and the growing threat of financial warfare, urging better data to monitor volatile gilts markets. These developments underscore the delicate balance between funding public services, fostering economic growth, and safeguarding financial infrastructure, as the government navigates trade-offs in a challenging global and domestic landscape.
Pension Tax Speculation: A High-Stakes Fiscal Debate
During Prime Minister’s Questions on 16 July 2025, the Prime Minister declined to rule out pension tax changes at the Autumn Budget, intensifying speculation about measures to address a projected £24–30 billion fiscal shortfall over the next five years.
Responding to opposition leader queries about potential taxes on pension contributions, such as reducing the 40% tax relief for higher earners, the Prime Minister emphasised manifesto commitments, stating, “We made absolutely clear manifesto commitments which she asked me about last week and we’re keeping to it: I’m not going to write the budget months out.” He defended investments in the NHS and public services, claiming, “It’s no wonder that after a first year of a Labour government, business confidence is at a nine-year high,” citing a Lloyds survey, though other surveys indicate a slump in corporate optimism. He attributed past economic stagnation to 14 years of Conservative governance, arguing, “I’ll tell you what’s bad for growth: 14 years of a Tory government – stagnant growth for 14 years.”
The refusal to dismiss pension tax changes has raised concerns, particularly after the OBR’s chief warned the Treasury Select Committee on 15 July 2025 that further tax hikes could harm economic growth. The OBR chief stated, “It needs to bear in mind that higher and higher levels of taxes are also not good for growth. If higher research and development expenditure is being funded by a higher tax burden, there are some choices and trade-offs that need to be paid for.”
City analysts suggest potential measures, including lowering the pensions annual allowance from £60,000, reducing tax-free cash limits, or introducing inheritance tax on unused pension funds. Such changes aim to restore the Chancellor’s £9.9 billion fiscal headroom, which relies on optimistic productivity forecasts that the OBR is likely to downgrade, aligning closer to the Bank of England’s more conservative projections.
Researchers from Oxford Economics, backed by The Investing and Saving Alliance, AJ Bell, and Hargreaves Lansdown, proposed alternatives to complex pension tax reforms, such as a standalone flat rate on unused pension funds above a threshold or exempting pots under £90,000 from tax. These measures, they argue, would raise equivalent revenue without causing delays for grieving families or unpredictable behavioural changes among savers. A public policy director at AJ Bell criticised current proposals as “arguably the most complex, time-consuming way” of raising funds, emphasising the need for simpler solutions to maintain public trust in pension systems.
The pension tax debate reflects broader fiscal challenges. The Chancellor’s growth-focused policies, outlined in the Leeds Reforms at the Mansion House speech, include deregulation and retail investment campaigns to stimulate the economy. However, the OBR’s scrutiny of a reversed £5 billion welfare savings plan, announced late before the Spring Statement, highlights the government’s tight fiscal constraints. The OBR chief noted that the government had £10 billion in headroom but chose not to pursue all savings, underscoring the delicate balance between fiscal discipline and public investment.
The potential pension tax raid risks deterring savings and investment, which could undermine long-term economic growth, particularly if productivity fails to rebound to pre-pandemic levels. Policymakers must carefully design any tax changes to avoid disincentivising retirement planning while addressing immediate revenue needs to fund critical services like the NHS.
OBR’s Economic Warnings: Tax Burdens and Fiscal Risks
The OBR’s chief, addressing the Treasury Select Committee on 15 July 2025, delivered a stark warning about the UK’s fiscal outlook, highlighting that the tax burden, nearing historic highs, could stifle economic growth if increased further. The Chancellor faces pressure to raise £30 billion to cover rising borrowing costs and unfunded welfare commitments, with potential measures including a wealth tax or a corporation tax surcharge on banks.
The OBR chief cautioned, “There are a number of different levers the government can pull,” but emphasised the trade-offs, noting that funding research and development through higher taxes could negate growth benefits. The OBR is reviewing its productivity forecasts, which underpin the Chancellor’s £9.9 billion fiscal buffer, and anticipates a downgrade, signalling a tougher economic outlook.
The OBR’s concerns were echoed by the new director of the Institute for Fiscal Studies (IFS), who, at an Institute for Government event, urged a shift beyond short-term fiscal revisions. She stated, “We need to break out of this cycle. I think it’s safe to assume that the chancellor will stick to her fiscal rules. But that alone doesn’t automatically equate to sustainable public finances. As the OBR reminded us all last week, there is a long list of adverse fiscal risks – put more bluntly, there are lots of reasons that demands for government spending could run far ahead of tax revenues.”
She advocated for better-designed policies and economic growth to make fiscal trade-offs more manageable, highlighting risks like ageing populations, climate change, and declining tax receipts.
The OBR also flagged a £20 billion hit to long-term borrowing costs due to waning demand for gilts from defined benefit pension funds, as noted by an OBR committee member. He warned, “You’ve got to find people and induce them to hold bonds. That means you’ve got to offer them a better deal.” This shift increases reliance on short-term bond issuance, raising costs and market volatility.
The combination of potential tax hikes, downgraded growth forecasts, and rising borrowing costs poses significant challenges to the government’s fiscal strategy, requiring careful calibration to maintain bond market credibility while fostering growth through investments in innovation and infrastructure.
FCA’s Alarm on Financial Warfare and Sovereign Debt
On 16 July 2025, the FCA’s chief executive warned peers on the Financial Services Regulation Committee that rising sovereign debt and financial warfare pose the greatest threats to UK market stability. With global sovereign debt surpassing $100 trillion in 2025, the FCA chief highlighted the risk of rapid bond sell-offs, exacerbated by a shift in the UK gilts market where hedge funds, many non-UK-based, account for over 90% of leveraged trading.
He stated, “The composition of the market has changed. There are some areas – and I call this out as one – where we need more data, and we need it faster, because the markets are faster. And we need more real-time data on trading in some of these fixed income markets so that we can understand what is going on and do our job for the whole system.”
Geopolitical risks, including cyberattacks on financial infrastructure, amplify these concerns. The FCA chief cited the 2022 Russia-Ukraine conflict, where Russia targeted Ukrainian banking systems, and the recent Iran-Israel conflict, where Israel’s cyberattacks disrupted Tehran’s trading systems and ATMs. He warned that such attacks on the UK’s financial systems could become “an increasing feature of the risk landscape,” threatening market integrity.
The Bank of England’s Financial Stability Report echoed these concerns, noting that a small number of highly leveraged hedge funds dominate gilt trading, risking a sell-off reminiscent of the 2022 crisis under Liz Truss.
The FCA’s call for enhanced real-time data aligns with the government’s push to reduce regulatory burdens, but the chief emphasised that strategic data collection is critical to monitor volatile markets. The combination of rising debt, opaque foreign bondholders, and geopolitical threats requires robust oversight to prevent disruptions to the UK’s financial infrastructure, which underpins economic stability and public confidence. Addressing these risks will involve investing in cybersecurity, improving market transparency, and fostering international cooperation to mitigate financial warfare threats, ensuring the City remains a resilient global financial hub.
