UK fiscal watchdog warns public finances are on unsustainable path

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UK fiscal watchdog warns

Highlights

OBR warns UK public debt becomes unsustainable in almost all scenarios without government action to contain health and social care spending pressures.
Health spending is set to rise from 8% of GDP in 2030-31 to 13% by 2075-76, with government spending (excluding interest) reaching 49% of GDP.
The OBR says debt can be stabilised at 95% of GDP if immediate action equals cuts or tax rises worth 3.8% of GDP starting 2030-31.

OBR sets out long-term spending pressures

As reported by the Financial Times, the Office for Budget Responsibility says in its annual fiscal risks and sustainability report that UK public debt moves onto an unsustainable and ever-rising path in almost all of its scenarios unless the government acts to contain spending pressures.

The report says the UK is in a challenging position relative to its peers after one of the steepest increases in public debt as a share of GDP among advanced economies over the past two decades. It identifies the ageing population as a key driver, with health spending expected to rise from 8 per cent of GDP in 2030-31 to 13 per cent in 2075-76, partly because productivity growth in healthcare tends to lag the wider economy.

The watchdog also expects similar growth in social care spending, while education is the only major area where pressure eases. In its central scenario, government spending excluding interest rises from 40 per cent of GDP in 2030-31 to 49 per cent by 2075-76.

Debt choices sharpen for incoming government

For Andy Burnham, who is preparing to become prime minister later this month, the findings complicate ambitions among allies to boost public investment to support growth across the country. The OBR says some policy changes could curb the long-term rise in spending, including uprating the state pension by average earnings instead of maintaining the current triple lock.

It says that change alone would reduce the projected increase in spending by a fifth. Burnham says on Friday he retains the triple lock, under which the state pension rises every April by whichever is highest of average earnings, inflation or 2.5 per cent.

Other options identified by the OBR include uprating welfare by inflation rather than average earnings. The watchdog adds that the shift to net zero presents the most immediate challenge on tax revenue because it reduces emissions-related receipts.

If the incoming government takes immediate action, the OBR says debt can be stabilised at 95 per cent of GDP from 2030-31 onwards through spending cuts or tax rises worth 3.8 per cent of GDP in that year. If action is delayed until the early 2050s, the required adjustment rises to 8 per cent of GDP, increasing the cost and shifting more of the burden onto future generations.

Our earlier coverage of the OBR’s long-term debt sustainability warning highlighted that, under current plans, UK public debt is projected to move onto an unsustainable rising path in most scenarios. We noted the watchdog’s estimate that stabilising debt around 95% of GDP could require tax rises or spending cuts worth about 3.8% of GDP in the early 2030s, with the burden increasing sharply if action is delayed and with ageing and healthcare costs as key drivers.

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