Britain’s public finances are on a “unsustainable” long-term path with debt levels that could more than triple without further tax hikes to cover the rising costs of an aging population and falling fuel taxes, the Treasury independent forecaster has warned.
The Office for Budget Responsibility said that if economic shocks continue to hit public finances, debt is on track to reach nearly 320% of annual national income (GDP) in 50 years – up from 96% now – unless successive governments increase their revenues. increase to offset rising costs.
“The pressure of an aging population on spending and the loss of existing car taxes in a low-carbon economy is putting public debt on an unsustainable path in the long run,” the OBR said.
In its annual health check of public finances, the OBR said the government had already spent as much this year – 1.25% of GDP – to help households cope with the cost of living crisis as it has fueled the economy during the recession. financial crisis of 2008.
If energy prices remain high in the coming year and ministers continue to extend this support, the government bond could rise by £40 billion in 2023-24.
Richard Hughes, the OBR chairman, said the UK’s debt burden had risen £1 trillion 20 years ago above forecasts, following a series of economic shocks – and there was no reason to believe these would stop.
Interest rates are already starting to rise, raising government borrowing costs, while an aging population puts a further burden on Whitehall’s spending departments, especially the health service.
“Many threats remain, with rising inflation potentially pushing the economy into recession, lingering uncertainty about our future trade relationship with the EU, a resurgence in Covid cases, a changing global climate and rising interest rates all lingering on the fiscal outlook,” the OBR said.
The switch to electric vehicles in the run-up to Britain’s promised ban on new petrol and diesel cars from 2030 would be another drain on revenues for decades to come. Fuel taxes are now a major source of tax revenue, while domestic electricity is taxed relatively lightly.
The OBR undermined claims by some Tory MPs that tax cuts would boost economic activity and improve prospects, warning that there was no evidence to support this.
“Tax cuts will not pay for themselves and would not improve the financial position in the long run,” said OBR chief of staff Andy King. “At least that I can think of, when looking at tax cuts, the direct tax costs of lowering that tax outweigh the indirect tax benefit of improved economic activity.”
The OBR’s central forecast shows that debt as a share of GDP will decline over the next 20 years as spending on education declines due to a lower birth rate and a slower increase in life expectancy reduces spending on state pensions.
But even without successive economic shocks, the UK debt-to-GDP ratio is projected to rise to 267% of GDP in 50 years.
Bringing that back to the pre-Covid level of 75% would require additional tax increases or cuts of 1.5% of GDP over the next 50 years, or £37 billion per decade over the next 50 years.
In the forecaster’s worst-case scenario, debt could reach 430% of GDP within 50 years if Britain increased defense spending from 2% to 3% of GDP, suffered a major one-off blow from a cyber-attack and sustained damage from a global trade war.
Before stepping down as leader of the Conservative Party, Boris Johnson pledged to increase defense spending to 2.5% of GDP and hinted that he might demand even higher spending to protect the UK from global military threats.
Hughes said it was understandable that governments should consider increases in defense spending as the geopolitical and economic outlook becomes increasingly uncertain. He said it meant the need to protect public finances was likely to involve more tradeoffs.
“Some risks are more uncertain. Energy prices may fall rather than remain high as geopolitical tensions ease; and the process of global economic integration can be revived. And some threats are largely unknown until now – as Covid was three years ago,” he said.
“But the lesson of the 20 years since the UK produced its first long-term public finance report is that all of these risks must be understood and mitigated if we are to ensure fiscal sustainability in what appears to be an increasingly risky world.”