OBR warns national debt is on ‘unsustainable path’ unless government takes action
The OBR forecast that government spending would rise to 60 per cent of GDP, from 45 per cent at the moment, whereas revenue will remain flat.
Public finances will be set on an “unsustainable path” in the coming years unless the government takes action, the spending watchdog warned today.
In a report released today, the Office for Budget Responsibility (OBR) forecast that public debt would rise to over 270 per cent of GDP by the mid-2070s, up from just under 100 per cent at the moment, due to a big projected increase in public spending.
The OBR’s forecasts – which are based on stated government policy – suggest public spending will rise to 60 per cent of GDP, from 45 per cent at the moment, whereas revenue will remain flat.
The increase in public spending will mainly be driven by the transition to net zero, the costs of supporting an ageing population and increased geopolitical tensions putting upward pressure on defence spending.
The OBR said rising health spending was likely to be the “single most important driver” of the projected increase in government debt. Health spending is forecast to rise to 14.5 per cent of GDP by 2074, up from 7.9 per cent, largely as a result of demographic changes.
The triple-lock, meanwhile, will see spending on state pensions rise to 7.9 per cent from 5.2 per cent in the same period.
The biggest single cost to net zero will be the fall in fuel duty revenue as a result of the looming 2035 ban on petrol car sales. Fuel duty revenue is set to fall to 0.1 per cent of GDP from 1.0 per cent.
With the debt pile set to increase significantly, the OBR warned that net interest spending would quadruple to 11.3 per cent of GDP by the 2070s.
“If these pressures and shocks were to materialise as we project, then governments would need to take mitigating policy action to prevent this debt spiral from occurring,” the OBR said.
David Miles, a senior official at the OBR, said: “The report shows…a strategy of staying where we are (on taxes) and increasing government spending in line with demands is unsustainable”.
It warned that returning debt to its pre-pandemic levels would require tax increases or spending cuts worth around £40bn per decade over the next 50 years.
If a government opted for spending cuts, the OBR said that this would require “significant improvements” in public sector productivity or “strict prioritisation” between competing pressures.
A government that opted for tax increases would have to weigh up the impact of a higher tax take on “incentives to work, investment and save,” it said.
Although the OBR acknowledged that its forecasts were highly uncertain, it warned that there was a “similar upward debt trajectory in nearly all the alternative scenarios that we consider”. Indeed, if further shocks were added to the forecasts, public debt would surpass 300 per cent of GDP.
However, the report also showed that there were actions which could make a meaningful difference to the path of public debt.
“Limiting the rise in global temperatures to less than 2°C rather than 3°C could alleviate around 10 percentage points of upward pressure on the debt-to-GDP ratio,” the OBR said.
“Improving the health of the population could reduce the rise in debt by a further 40 per cent of GDP,” it added.
Improving productivity would make the biggest difference of all, with every 0.1 per cent increase in productivity growth reducing the rise in the debt-to-GDP ratio by 25 percentage points.
The OBR’s report chimes with a House of Lords report released earlier this week, which urged the government to face the “grim reality” of the growing national debt.
