A stronger forecast from the IMF, but not a blank cheque for the Budget

In summary

• The IMF's upgraded growth forecast is welcome news and suggests the UK economy is proving more resilient than many anticipated

• Increased growth alone is unlikely to remove the difficult fiscal choices facing the government ahead of Budget 2026

• Rising spending commitments and ongoing economic uncertainties continue to constrain the Chancellor's options

• Policymakers will need to balance political priorities against the need to maintain fiscal discipline and market confidence

• The ultimate test will be whether improved economic performance can be translated into sustainable public finances and long-term growth

The IMF’s latest forecast appears, at first sight, to offer the UK government some welcome breathing space. But a stronger growth forecast does not mean carte blanche for the Chancellor. Debt interest, defence, energy support and a proposed National Care Service (NCS) are competing for resources within an already stretched £1.36 trillion spending envelope.

It now expects the UK economy to grow by 1.3% in 2026, up from 1.0% in July and 0.8% in April. Stronger activity should support tax receipts and the debt-to-GDP ratio. But the IMF expects growth to ease to 1.2% in 2027, as higher energy prices and long-term interest rates weigh on consumption and investment. It forecasts inflation averaging 3.3% this year and 2.8% next year.

Its message to the UK was not to spend the upgrade in the upcoming Budget, but to “stay the course” on deficit reduction. The economy is performing better now, but the pressures on the public finances have, ultimately, not gone away.

Fiscal headroom is determined by the Office for Budget Responsibility (OBR) forecast and the government’s fiscal rules, not by the IMF forecast alone. More growth can lift receipts, but higher inflation, gilt yields and spending can absorb the gain. That is already visible in the outturn: borrowing reached £77.3bn in the first five months of 2026–27, £8.1bn above the OBR’s March profile.

Receipts were £1.1bn ahead of forecast, but central government spending was £7.4bn higher, driven particularly by social benefits and debt interest. Net debt stood at 95.1% of GDP in August, up from 93.8% a year earlier. Headroom is therefore not money in the bank; it is the residual of a forecast that can move quickly.

The scale of the trade-offs is particularly clear when considering the commitments that have already been made. Total public spending was around £1.36 trillion in 2025–26. Of that, approximately £379bn went on social care, £277bn on health, £146bn on education and £110bn on debt interest.

It is worth noting that debt interest costs are almost double the core defence budget of roughly £62bn. So, it is more than an accounting line as every increase in financing costs narrows the room to fund hospitals, schools, social care, infrastructure and national security. The UK is particularly exposed because a material share of debt is index-linked, and maturing debt, arguably, should be refinanced at prevailing yields.

The global backdrop is also creating new calls on that spending envelope. Wars in Ukraine and the Middle East have raised energy and security costs, while disruption to trade routes and a more protectionist global agenda threaten demand and supply chains. The Defence Investment Plan (DIP) commits £297.7bn over the four years to 2029–30, including £15bn of additional spending power.

Alongside this, the proposed NCS could ultimately require an additional £7.5bn to £18bn a year, depending on the scope of the offer, while the planned social care Fair Pay Agreement is backed by £500m in its first year from 2028. These commitments are different in scale and timing, but all add to the pressure on an already constrained spending settlement.

Crucially, these commitments are not yet matched by a single, settled funding plan. Of the DIP’s extra £15bn, £4.7bn is explicitly marked “to be funded at Budget 2026”. The package also assumes £4bn from one-per-cent reductions in other departments’ capital budgets, £2bn from further energy-department savings, £800m from transport and £1.1bn from asset sales.

The NCS is intended to be phased in during the next Parliament and funded partly from changes to the state Pension triple lock after 2030, but those savings build only gradually and may not meet the full annual cost. The £500m first-year Fair Pay Agreement is more immediate and will become a recurring pressure if higher pay is not matched by productivity gains or a durable funding stream.

Taken together with the commitment to raise core NATO defence spending to 2.7% of GDP from 2027–28, 3% in the next parliament and 3.5% by 2035, these are not one-off costs: they ratchet up the spending baseline and risk crowding out other public services and productive investment.

Conference commitments add a second major claim. The proposed NCS would provide free personal care for older people in the next parliament. A Scotland-style offer has been estimated to require around £7.5bn a year of additional funding; a fuller NHS-style model could cost around £18bn a year.

The government proposes to use savings from reforming the State Pension triple lock after 2030, estimated at £15bn a year only by the end of the 2030s, but those savings arrive later and may not cover the more expansive version. Any NHS savings from fewer delayed discharges would also be uncertain and gradual. The Budget may begin laying the ground, but it cannot make this promise costless.

1. Targeted relief rather than universal subsidy: With energy prices feeding into bills and inflation, there will be pressure to intervene. But broad subsidies can quickly cost several bn and weaken incentives to reduce consumption. The IMF’s prescription—temporary, targeted and non-distortionary support—points to focused help for the households and energy-intensive businesses most exposed.

2. Finding the unfunded defence money: The most immediate identifiable Budget ask is the £4.7bn gap in the DIP. Funding it through borrowing would weaken the fiscal position; funding it through departmental capital reductions risks displacing infrastructure and growth-enhancing investment. The Chancellor will need to show that the assumed savings are deliverable rather than simply transferred pressures.

3. Sequencing social care reform: A NCS is unlikely to be funded in full at this Budget. More plausible is a costed pathway: define the initial entitlement, build workforce and provider capacity, identify interim funding before pension savings mature, and make expansion conditional on demonstrable NHS savings and fiscal capacity.

4. Rebuilding a genuine fiscal buffer: With year-to-date borrowing already £8.1bn above profile and long-term yields elevated, using every pound of forecast headroom would leave the Budget vulnerable to another energy, interest-rate or security shock. A larger margin against the rules may produce fewer announcements, but it could reduce the risk premium on UK debt and the need for a later correction.

Reducing debt is not an end in itself and attempting to cut it too quickly can weaken demand and the growth needed to stabilise the public finances. But the current arithmetic argues against treating better growth as permission for permanent new commitments.

The government is already spending about £110bn a year on interest; it must find £4.7bn for the near-term defence plan; and it has set out a social care ambition that could ultimately require between £7.5bn and £18bn a year. Those sums sit alongside existing annual expenditure of £379bn on social protection and £277bn on health.

The better objective is therefore to put debt on a credibly declining path while improving the composition of spending: control recurrent commitments, protect those most exposed to energy shocks, fully cost defence promises and phase social care reform alongside a durable funding source.

The IMF upgrade tells us that the UK has been more resilient than feared. However, it doesn’t tell us that the fiscal constraint has disappeared. The Budget will be judged by whether it confronts the pounds and pence choices behind that distinction.