The UK is Heading for a Massive Economic Wakeup Call 

With large fiscal and trade deficits the UK needs continued foreign capital inflows, but is the UK the weakest link? In the G7 France, Italy, Japan and the US also have weak public finances but also have protections not available to the UK. Emerging market (EM) economies have on average higher growth rates, better demographics, and sounder public finances than the G7. Even South Africa – a mid-rank EM economy  – currently looks a better prospect than the UK. The UK’s refusal to confront reality world risks a major loss of financial market confidence, but outside the EU the UK still has the capacity to respond to such a wakeup call with a radical shift to fiscal discipline and supply side reform. 

In my career I was both an economist and a fund manager. In previous articles analysing the UK’s increasingly poor economic outlook* I wrote with my  economist hat on. This time I change hats to look at how a global investment manager might assess the UK. The focus is on currencies and bonds, since a good stock picker can find cheap companies even in troubled economies or overvalued markets. For example, US markets look extremely expensive  – driven by a probable AI bubble  – but there will still be US shares that offer value.

The UK needs to continuously attract foreign capital to finance its large budget and current account deficits, so it needs to be an attractive investment prospect. It increasingly is not. The biggest change in the investment world in recent decades has been the huge improvement in the fundamentals of emerging market (EM) economies relative to that of the major developed economies (G7). EM economies on average grow at more than double the rate of the G7, have much more favourable demographics, AND have sounder finances (EM debt/GDP ratios average 75% compared to 110% for the G7), while often offering cheaper equity market valuations and/or higher bond yields.

In what follows I compare South Africa and the UK as possible investment alternatives. Why South Africa? I know the country well, having worked as an economist/fund manager there for many years. Coming across some of my (long) past work on SA Budgets prompted me to update myself by looking at the recent SA Budget. It was a real wake up call for me to find that in key respects SA’s fiscal and economic fundamentals – SA is a not particularly attractive EM economy*, with severe ongoing challenges – are now superior to that of the UK. This was the genesis of this article.

Key Fiscal and Economic Fundamentals in South Africa are Better than the UK

The data in the following table compares key economic and fiscal variables for

SA and the UK for the fiscal year (FY) just ended (2025/26) and projections for

FY 2028/29. The data are from the Office of Budget Responsibility (OBR) 2026 Fiscal and Economic Outlook, and the SA Treasury 2026 Budget Review (an equally professional document).

SA is an unusual EM economy in that it has had relatively low growth in recent decades, and growth is forecast at only 1.8% p.a. over the 2025/26 to 2028/29 period. However, this is higher than the 1.4% forecast for the UK. SA’s inflation is expected to average just over 3%, only slightly higher than the UK.

These forecasts are pre-Iran war, but SA is arguably better placed to withstand the additional strains of the war because their fiscal house – as shown in the table – is in better order. Projected budget deficits are similar, but SA’s debt/GDP ratio at 78.9% is lower, as is the share of foreign owned debt – only 10% versus a vulnerable 30% for the UK. Furthermore SA’s plan to reduce the deficit in coming years seems more credible. Crucially SA is already running a primary budget surplus  – meaning revenue exceeds spending excluding interest payments – of nearly 1% of GDP. This level of surplus is high enough to ensure stabilisation of the debt to GDP ratio, and as that surplus increases to the 2+% level the debt ratio will fall. In contrast the UK is still running a primary deficit and only achieves a surplus – according the OBR – after 2028/29. Even worse, this projected UK primary surplus relies on politically implausible cuts in UK government spending in the later years.

Unlike the UK SA has a modest but credible plan to raise its sustainable growth rate – the only way to restore full fiscal and economic health. Note that SA has a much lower tax burden – tax revenue as a % of GDP – than the UK, partly due to SA’s much smaller welfare system. Here is a quote from the March 2026 SA Budget Review – words you will never hear from Rachel Reeves:

“Beyond a certain point, increases in tax rates may not generate additional revenue and are detrimental to economic growth. Ultimately, the best option to increase revenue is by broadening the tax base and growing the economy”

True to this philosophy the Finance Minister cancelled a proposed tax increase and restored inflation indexation of tax thresholds after a two year freeze. In contrast, the UK faces continued fiscal drag through non-indexation of thresholds for another four years, taking the tax burden to new  highs.

The bulk of SA’s deficit reduction therefore comes from spending restraint, whereas the UK relies on ever rising taxes. Furthermore, SA’s spending restraint focuses on current spending, as capital spending is to increase over the period by a remarkable 32% (nominal) in order to fix SA’s creaking infrastructure. Government capital spending in the UK over the same period only rises by 10% – barely nothing in real terms. In addition to higher taxes the UK government is imposing increasing regulations on businesses and landlords, drastically curtailing labour market flexibility, moving the UK into closer alignment with the slowest growing part of the global economy – the EU – and pursuing an ideological  growth-damaging net zero agenda. The UK is therefore in practise enacting an aggressive anti-growth plan.

South Africa’s 10-year government bonds currently offer a yield of almost 9% compared to the equivalent UK yield of around 5%. Since the mid-2024  election SA has been governed by an ANC-dominated coalition which includes pro-market smaller parties. Greater pragmatism and the beginnings of an anticorruption drive have emerged. The SA Treasury maintained a culture of professionalism and fiscal discipline even under the  severe pressures of the final apartheid years and the early decades of the ANC government***, and this culture appears to have re-asserted itself.

As a global portfolio manager I would have no hesitation – given the above analysis – in buying SA bonds and SA Rands in preference to UK bonds and Sterling. There are plenty of emerging market economies – which in total comprise more than 50% of global GDP – with better fundamentals than South Africa, highlighting just how vulnerable the UK might be to a sudden loss of foreign investor confidence. The UK already pays a large and rising premium to borrow money over other G7economies, and the Bank of England has recently flagged concern that amongst recent foreign buyers of UK bonds are  leveraged hedge funds and banks.

A Brief Comparison of the UK with the Rest of the G7

Some UK analysts take comfort from the belief that some members of the G7 are in an even worse position than we are. Certainly, France, Italy, Japan, and the US all have debt/GDP ratios notably higher than 100% compared to our 95%. However, each of these have protections not available to the UK.

France and Italy are sheltered to a significant (though not total) degree from a major speculative attack by their membership of the Euro – bolstered as it is by the huge current account surpluses and sound public finances of Germany. (This will be taken by Remainers as an argument for the UK rejoining the EU,  but that would be the safety of the prison – a point I return to in my conclusion).

Japan is able to protect its currency and markets – should it choose to – by utilising its huge foreign asset holdings. It has a net international investment position (NIIP) of $3.6 trillion, or 77% of GDP. The UK by comparison has a negative NIIP of close to 40% of GDP. The Japanese central bank could also continue to raise interest rates from their still very low level of 1%.

There is no shortage of alarmists about US fiscal indiscipline and the survival of the $ as the world’s reserve currency. I am not one of them. It is true that the US has an even larger negative NIIP than the UK – a whopping 86% of GDP, but this is a consequence of the huge demand for dollar assets for global transactions and reserve purposes, and the desire to share in the US’s dynamic economic system and free capital markets. As long as those remain the $ will maintain its global role.

As I wrote in my January piece entitled “An American Economic Renaissance” there is a vigorous new supply side revolution taking place under President Trump. One aspect of this revolution that I did not write about then is the rocket booster that Trump has put under the comeback of nuclear power. Accepting the inherent inefficiencies of wind and solar, a blizzard of executive orders has initiated a vast public and private sector drive to rapidly “nuclearize” the US energy system.

Critics still write about US fiscal deficits of 7% of GDP “as far as the eye can see”, while failing to notice that since Trump took office the deficit has already fallen to 5% of GDP. The latest data show that the Federal work force has been reduced by over 300 00 people – a 12% fall. In no other G7 economy would this be possible. Although overall US GDP growth slowed in H225 and Q426 – partly due to the above noted fiscal contraction – private business investment continues to grow strongly – up nearly 10% at an annual rate in Q1 26. The first estimates for Q2 GDP from the Atlanta Fed  are 3.6% annual growth. Maintaining growth at that level  – eminently possible under current policies – would gradually put US public finances back on a sustainable footing.

A Wake Up Call for the UK

I wish it were not so, but this analysis reveals that the UK is acutely vulnerable to any further negative economic or political shocks. Continued closure of the Strait of Hormuz, or a further shift to the left in economic policy – Ed Miliband for Chancellor anyone? – are possible triggers. Such a crisis could make the Truss/Kwarteng debacle look like a Sunday school picnic.

Apart from adverse economic data and trends, foreign investors must be disturbed by the staggering level of complacency amongst UK politicians and the public. Even the centre-right parties seem not to grasp the scale of the problems, much less try to educate the public to what might be needed as Mrs Thatcher did in the late 70’s. A totemic issue is the triple lock pensions policy.

Both Reform and the Conservatives support maintaining it, yet it is selfevidently unaffordable. According to polling voters are against scrapping it by 65% to 11%, and have no conception of how far UK living standards have fallen compared to the US. They are aghast when told that average UK GDP per head is lower than in the poorest US state – Mississippi – and that since 1990 average US GDP per head has moved from 13% higher than the UK to 63% higher (not a misprint – 63%!) And yet the current government sees sneaking back into the EU as a growth strategy!

Being outside the EU means that we still have the capacity, if not yet the will, to choose the market based growth strategies – including a much more realistic energy policy – that have been so successful in the US. Since 2000 the UK has moved from being a net energy exporter to now importing 44% of its primary energy supply. Over that same period the US has moved from being a net energy importer to the largest global exporter of oil and gas. Even within the US the evidence is overwhelming – US states that adopt radical supply side reforms (mainly Republican) grow much faster than states that follow EU-style statism (mainly Democrat).

The bad news is that an economic wakeup call to the UK is coming. The good news is that it may turn out to be exactly what we needed.

Robert Lee  May 7^th 2026

* The larger EM economies include China, India, Brazil, Mexico, Indonesia,

Turkey, Argentina, and Thailand

**Total government revenue is higher than tax revenue due to other sources such as fees and dividend income

***I had several private meetings with Derek Keys, SA Finance Minister in the latter days of the De Klerk government. He mentored the ANC’s Trevor Manual, and he assured me that “Trevor will be a better minister than me because he understands the need for fiscal discipline and market based reform and is much tougher”. And so it proved!