UK Debt Faces Unsustainable Rise Without Prompt Action, Warns OBR
The government’s independent economic forecaster has emphasized the urgent need for policymakers to intervene to prevent public debt from escalating unsustainably over the coming decades. This challenge is driven by demographic changes, including an aging population, and increased defence spending.
Highlighting the difficulties confronting the next prime minister, Andy Burnham, the Office for Budget Responsibility (OBR) stated that without government measures,
“debt would move on to what would be an unsustainable, ever-upward path from around the 2040s.”
The OBR noted that defence expenditure must rise by an additional £28 billion annually to fulfill the government’s commitment to allocate 3.5% of GDP to defence, despite the recent announcement of increased spending.
In its latest fiscal risks and sustainability report, the OBR assumes that the government will meet this defence spending target. The report also identifies rising costs in health and pensions as significant pressures on public finances.
State pension expenditure is projected to grow from 5% of GDP to 9% over the next 50 years if current policies remain unchanged. A substantial portion of this increase is attributed to the triple lock policy, under which pensions rise by the highest of earnings, inflation, or 2.5%.
The forecaster suggests that adjusting pension increases to track average earnings instead could reduce spending by 2% of GDP by the end of the period.
Health spending is expected to rise from 8% of GDP to 13% by 2075, largely due to the increasing proportion of older individuals in the population. The OBR notes that growth in health expenditure could be moderated if productivity within the health sector improves.
While the fiscal plans of Chancellor Jeremy Hunt are projected to stabilize the debt-to-GDP ratio at approximately 95% by 2030-31, the OBR’s baseline forecast indicates that the ratio will begin to rise again from the mid-2030s onward.
Presenting the report, Tom Josephs of the OBR warned that this upward trajectory could commence earlier if the government fails to adhere to its ambitious deficit reduction plans in the near term or if the economy experiences another significant shock.
Conversely, stronger economic growth could delay and lessen the increase in the debt-to-GDP ratio, provided that additional revenues are allocated to improving public finances.
Josephs, a member of the OBR’s budget responsibility committee, stressed the importance of early fiscal action, stating that the sooner public finances are repaired, the less severe the necessary adjustments will be.
“The significant uncertainty around these projections should not be used as an excuse for inaction. Unsustainable fiscal outcomes that may not occur for some years are today’s challenge, not just tomorrow’s,”
he said.
He further explained that the scale of fiscal adjustment required would be twice as large if delayed until the middle of the century rather than implemented in the early 2030s.
“Doing this earlier would be less costly than delaying the required fiscal adjustment,”he added.
The OBR has been operating without a permanent director since last December, following the resignation of Richard Hughes over the inadvertent early release of budget details. The economist Jonathan Haskel, nominated by Chancellor Hunt as Hughes’s successor, has yet to be confirmed in the role.
