Britain’s economy is growing again — just not fast enough to spare Chancellor Rachel Reeves from another difficult budget. The UK expanded by roughly 0.1% in August, keeping the economy on track for about 0.2% growth in the third quarter, but that modest rebound won’t be enough to close a fiscal hole opening beneath the government’s plans, according to analysis from FXStreet.

Where the £25 billion gap comes from

The Office for Budget Responsibility is expected to downgrade its economic assessment this autumn relative to its Spring Statement forecast, chiefly on weaker productivity assumptions. Combined with higher gilt yields and a series of policy reversals over the past year, that downgrade is projected to blow a roughly £25 billion annual hole in the public finances compared with the position Reeves described in March, per the same FXStreet analysis. A separate assessment attributes some of the UK’s recent resilience to a substantial rise in government spending — departmental budgets have grown roughly 4% in real terms — a tailwind officials do not expect to persist into the next fiscal year.

This follows an already-large tax package. Reeves’s autumn 2025 budget delivered more than £26 billion in new tax measures, according to Allianz Trade’s UK economic outlook, on top of £41.5 billion in tax increases the year before. Much of that revenue is earmarked for higher welfare spending, leaving comparatively little room for growth-focused stimulus.

The government’s counter-narrative

Downing Street has framed its record differently. In its own Spring Forecast presentation, the government pointed to inflation falling faster than expected, GDP per person growing more than projected in the original Budget, and household energy bill relief as evidence its plan is working, according to the UK government’s own Spring Forecast statement. Officials also cite the UK’s growth rate as the fastest in the G7 among European economies in 2025.

The Bank of England, meanwhile, has penciled in third-quarter growth of around 0.4% — a target that already looks difficult to reach given the pace of expansion through August and September, according to FXStreet’s assessment of the BoE forecast gap.

Why global finance is watching

For institutional investors from Singapore to Dubai, the UK’s fiscal trajectory matters beyond domestic politics. Persistently elevated gilt yields make UK sovereign debt more attractive on a relative-yield basis but signal continued fiscal strain — a dynamic that has already accelerated the migration of UK-domiciled wealth toward lower-tax jurisdictions including Singapore and the UAE (see our companion report on the non-dom exodus). A credible autumn budget, or the absence of one, will shape whether that capital flow accelerates further.

Russia’s federal budget deficit hit 4.58 trillion rubles — roughly $58.8 billion, or 1.9% of GDP — in the first quarter of 2026 alone, already surpassing Moscow’s entire annual deficit target of 3.79 trillion rubles, according to Finance Ministry data reported by The Moscow Times. Total revenue fell 8.2% to 8.3 trillion rubles even as spending jumped 17% to 12.9 trillion rubles.

Oil Revenue Is the Core Problem

The pain concentrated almost entirely in energy receipts. Oil and gas revenue collapsed 45.4% year-on-year in the first quarter, according to Meduza, which attributed the decline primarily to falling global oil prices alongside reduced export volumes following repeated Ukrainian drone strikes on major export terminals including Ust-Luga, Primorsk and Novorossiysk. By April, cumulative hydrocarbon revenue for the year had fallen 38.3% to $30.6 billion, according to analysis published by Ukraine’s foreign intelligence service, SZRU, which noted all three key energy revenue streams — additional income tax, gas export duty, and mineral extraction tax — collapsed simultaneously.

How the Kremlin Is Plugging the Gap

Two mechanisms are absorbing the shock. First, Moscow raised its base VAT rate by 2 percentage points to 22% starting in 2026 and stripped most small-business VAT exemptions, pushing non-oil-and-gas revenue up 10.2% even as the broader economy weakened, according to SZRU’s analysis. Second, and more significant, the treasury has leaned heavily on domestic debt markets: OFZ bond placements delivered 1.7 trillion rubles net over four months, covering 45% of the annual deficit, according to a contrarian assessment from the New Eurasian Strategies Centre.

That analysis argues the more likely 2026 outcome isn’t fiscal collapse but simply higher spending financed by cheap debt — revenue collection is running 3-4 percentage points behind the pace of recent years, but reserves and borrowing capacity remain deep enough that the “fiscal squeeze” narrative may overstate near-term risk.

The National Welfare Fund Problem

The structural issue is longer-term. Since early 2025, oil prices have stayed below the threshold needed to replenish Russia’s National Welfare Fund (NWF), meaning the sovereign buffer that absorbed prior shocks is no longer being topped up, according to the OSW Centre for Eastern Studies. Finance Minister Anton Siluanov has acknowledged the original 1.6%-of-GDP deficit target may need revision, alongside discussion of tightening Russia’s fiscal rule parameters, per Interfax.

Corporate Stress Is Spreading

The fiscal strain is showing up in the private sector too. More than half of large Russian companies ended 2025 with declining profits and frozen investment plans, and roughly 300 companies were reportedly preparing to close as of late February 2026, according to Ukrainian intelligence reporting cited by NV. For the first time on record, 74 of Russia’s regional budgets (oblasts) reportedly fell into deficit simultaneously.

The bottom line: Russia’s 2026 fiscal position is genuinely deteriorating relative to plan, but with deep reserves and functioning debt markets still available, the more accurate framing is a slow-motion transition to war-financed deficit spending rather than an acute crisis — one whose durability depends almost entirely on how long global oil prices stay depressed.

Britain’s headline economic data has looked defensible in 2026: the economy grew 0.6% in the first quarter, unemployment has stayed contained, and inflation, while above target, hasn’t spiralled. Yet underneath that data, business sentiment has collapsed to levels not seen since the post-mini-budget turmoil of 2022. The ICAEW Business Confidence Monitor recorded minus 14.6 for the second quarter — six consecutive quarters in negative territory, while the Institute of Directors’ sentiment index cratered to minus 61 in June, down from minus 53 in May, with the revenue-expectations sub-index collapsing to 11 from 27, its lowest reading of the year.

Most coverage has treated this as a generic “confidence is soft” story tied loosely to the Middle East conflict. The more precise and underreported explanation is a specific transmission mechanism: an energy-cost shock colliding with a Bank of England that cannot cut rates, arriving at the exact moment the UK is also absorbing a leadership transition.

The Mechanism: Energy Costs Meet a Frozen Bank Rate

The Bank of England has held its base rate at 3.75% through the summer, and Governor Andrew Bailey has been explicit that rate cuts once priced in for 2026 are now “off the table.” His reasoning: the US-Iran conflict pushed energy prices higher for months, and even as oil has since retreated, the inflationary pressure from that period is still working through the pipeline. Chief Economist Huw Pill went further, warning rates might need to rise again if inflation — currently at 2.8%, above the 2% target — proves persistent, noting the economy may still be running beyond its productive capacity.

For businesses, this is the worst combination: input costs that rose sharply during the conflict period, a central bank unwilling to ease borrowing costs to compensate, and — according to the IoD survey — 72% of businesses reporting rising energy and fuel costs, with a fifth facing increases of at least 25%. Falling confidence in this context isn’t sentiment noise; it’s a rational response to a genuine margin squeeze with no near-term monetary relief in sight.

The PMI Confirms It’s Not Just Survey Noise

S&P Global’s composite Purchasing Managers’ Index — a harder, transaction-based confidence signal — fell to 49.4 in June, its lowest level in 14 months, with services activity slumping to a 41-month low of 48.7. Anything below 50 signals contraction. The drop was driven specifically by weaker consumer discretionary spending and businesses delaying planned expenditure — the textbook pattern of firms battening down ahead of an anticipated downturn rather than merely feeling gloomy.

The Political Overlay Nobody’s Pricing Correctly

Compounding the energy-and-rates squeeze is a leadership transition most international coverage underweighted. Prime Minister Starmer’s decision to step down following poor local election results has cleared the way for Andy Burnham to become Prime Minister, securing nominations from more than 320 Labour MPs. Business Secretary Peter Kyle has separately floated the possibility of legislating to force UK pension funds to invest more domestically if voluntary commitments fall short — a policy signal that, regardless of its merits, adds a layer of regulatory uncertainty for institutional allocators at precisely the moment firms are already retrenching.

The Insolvency Risk This Points Toward

The Credit Protection Association’s own read on the data is the most operationally useful: falling confidence “often leads businesses to delay investment, tighten spending and become slower or more selective in paying suppliers” — a dynamic that shows up in payment-delay data before it shows up in headline insolvency statistics. With hospitality alone reporting nearly a quarter of venues operating at a loss and pub closures running at nearly two a day in early 2026, the sectors most exposed to discretionary consumer spending and energy costs are the ones most likely to show up in insolvency data over the coming two quarters — a lagging indicator that the confidence surveys are already flagging in real time.

What to Watch Next

Three signals will determine whether this is a temporary dip or the start of a genuine downturn: whether the Bank of England’s July Monetary Policy Report signals a rate rise rather than a hold; whether new Prime Minister Burnham’s tax proposals add or remove uncertainty for business investment; and whether the services PMI stabilises above 50 once the residual energy-price effects from the Middle East conflict fully clear the inflation pipeline.