UK Budget Deficit: What It Means To You and Can Your SIPP Be Affected?

The UK budget deficit grows when the government spends more money than it receives in revenue from taxes and other sources. 

With provisional estimates showing that the public sector borrowed £148.3 billion in the financial year ending March 2025, the figure represents the third-highest borrowing in any financial year since records began in 1947, according to data from the Office for National Statistics (ONS). 

Only 2021 and 2010, two financial years that followed the global pandemic and financial crisis, respectively, weighed in heavier than this year for budget deficits. However, these figures don’t take factors like inflation into account. 

As a percentage of gross domestic product (GDP), borrowing in the financial year ending March 2025 reached 5.1%, which marked a 0.3 percentage point increase from the year prior. 

How Could the Budget Deficit Affect You?

For individuals, a higher government budget deficit could lead to higher taxes, more public service cuts, or higher borrowing costs. 

Critically, to cover the increasing costs of repaying the budget deficit, the government may look to implement more taxes on UK residents or encourage more investors to buy its debt by offering higher interest rates on gilts. However, this strategy could see interest rates for consumers and businesses increase, creating an unwanted impact on the housing market as mortgage costs once again rise. 

Borrowing more money from the central bank can also create an increase in the money supply, contributing to inflation. The wider impact of this can hurt the purchasing power of consumers, causing a more widespread economic slowdown. 

For investors, the higher cost of living may erode the ability of investors or pension savers to grow their wealth in the same way as before, due to higher energy prices as well as everyday essentials. 

Although higher deficit spending is generally associated with stimulating the economy during a slowdown, persistent, high deficits will be a cause for concern among investors and could lead to a widespread loss of market confidence, which may stifle any economic recovery. 

Is Your SIPP Safe? 

How could SIPP investors be affected by the budget deficit? Because your private pensions are self-invested, your pension pot is only as strong as the level of resilience you’ve built against possible economic slowdowns. 

Self-invested personal pension (SIPP) holders can be indirectly affected by the broader economic fallout of a growing or persistent deficit, such as growing inflation or volatility in markets. 

Critically, if inflation begins to rise in the wake of a growing budget deficit, you may want to monitor your SIPP to ensure that your pot is growing at a pace that continues to deliver growth in real terms. This means looking to ensure that your annual performance remains higher than the rate of inflation. 

Protecting Your SIPP 

Because private pensions can offer tax relief with a 20% government top-up on personal contributions, the investment strategy remains a highly effective way of growing your wealth even in an economic downturn, should the budget deficit struggle to be addressed, but it may be worth looking more to diversified investments to build your SIPP portfolio to help gain more resilience, looking further afield. 

One popular strategy among SIPP investors is to invest heavily in growth assets like equities at a younger age before switching to conservative assets like bonds as they reach retirement age. 

While this is a safe approach to consolidate your wealth closer to retirement, it relies on many variables that call for a more nuanced approach. 

For instance, it can be difficult to know when you’ll retire. The State Pension age in the UK is currently 66 years old and is expected to begin gradually increasing from 2026. With the government likely to be looking at ways to cover its growing budget deficit, it may consider pushing the State Pension age further back over the coming years, upending your long-standing investment plans. 

Instead, think about more of a proactive approach to your SIPP portfolio. Being more speculative when you’re younger could help your investments, but also adapt your strategy based on the economic outlook. This flexibility could help you to maximise your earning potential in a bull market while offering more protection in a downturn.