Britain’s public finances are on an unsustainable path and rapidly deteriorating, the Treasury’s fiscal watchdog said in a report that highlighted multi-billion-pound demands for spending on defense, climate and health.
(Bloomberg) — Britain’s public finances are on an unsustainable path and rapidly deteriorating, the Treasury’s fiscal watchdog said in a report that highlighted multi-billion-pound demands for spending on defense, climate and health.
The Office for Budget Responsibility said in its fiscal risks report that UK public debt will soar to more than 300% of gross domestic product by 2072-73, a scenario deemed “optimistic” given the threat of future shocks.
Stopping debt from rising above 100% of gross domestic product, its current level and the highest since the 1960s, would require tax rises and spending cuts of 4.4% of GDP in 2028-29.
“The pressures on the public finances have mounted considerably since the last time we did one of these projections,” Richard Hughes, chair of the OBR, said at a briefing Thursday. “They’re putting more pressure on our public finances more quickly than you see in other countries so rising interest rates constrain us more quickly than they do in the US, France and Germany.”
The findings underscore the tensions Prime Minister Rishi Sunak’s government is under, with voters demanding improvements in strained services, such as in healthcare, at a time when the public finances are already stretched. He is also under pressure from members of the ruling Conservative Party and business groups that are seeking tax cuts.
In a bleak assessment of the country’s long-run finances, the OBR estimated that:
- Retiring baby boomers and higher inflation will cause the country’s pensions bill to rise £23 billion ($30 billion), or by 0.8% of gross domestic product, by the 2027-28 fiscal year when compared with the start of the decade.
- The spread of electric vehicles will drain £13 billion a year in fuel duties from the Treasury by 2030 while public investment to support the shift to net zero emissions may cost £17 billion a year by then.
- The outbreak of war in Ukraine and growing security threats in Asia indicates that defense spending may rise by £13 billion a year in today’s terms — to 2.5% of GDP from 2%.
The OBR said the public finances are on a “very risky” footing after a series of shocks including the Covid pandemic, the war in Ukraine and soaring interest rates. It warned that the UK’s finances are more vulnerable than many other advanced economies.
The OBR said the Treasury’s finances are especially vulnerable to shocks by it having more inflation-linked debt than peers, shorter maturities and the sharpest rise in borrowing costs of the Group of Seven nations in the last 12 months. It also has more of its debt in the hands of foreign investors than most G-7 countries, leaving it hostage to swings in global sentiment.
“What the series of shocks we faced over the last decade have done have basically accelerated a lot of fiscal pressure at us,” Hughes said. “The 2020s are turning out to be a very risky era for the public finances.”
The OBR said the Chancellor of the Exchequer Jeremy Hunt’s plans for stabilizing and reducing debt are “relatively modest by historical and international standards.” Hughes said delay or inaction in tackling these issues would lead to debt rising to unsustainable levels.
The Bank of England’s quantitative easing program will cost the state a total of £118 billion over its lifetime, the OBR said in an updated analysis of the money-printing program. In March, it had estimated the net loss on the £895 billion money printing program at £63 billion but changes in interest rates and inflation since then have worsened the outlook.
The OBR stressed that the calculation was “not an assessment of the overall fiscal, let alone economic, impact of QE” since it was launched in 2009, because it had other beneficial effects such as boosting employment and growth in the immediate aftermath of the financial crisis and subsequent years.
“The wider economic and fiscal benefits of these interventions would need to be taken into account in any comprehensive assessment of the impact of QE,” the OBR said.
(Updates with quotes from briefing and context from first paragraph.)
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