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The UK’s public debt is on an “unsustainable” upward path because of trends such as population ageing and the costs of climate change, the government’s fiscal watchdog has warned.
Surging public spending is projected to lead to a rise in the ratio of public debt to 274 per cent of GDP over the coming 50 years, compared with less than 100 per cent now, according to the Office for Budget Responsibility.
Over the same period, public spending is projected to rise from 45 to more than 60 per cent of GDP, even as revenues remain at about 40 per cent of GDP.
“These projections show debt on an unsustainable path over the next 50 years,” said the OBR in its Fiscal Risks and Sustainability report on Thursday, which analyses the longer-term trends in the UK’s finances.
It comes as the Labour government warns of painful choices ahead of its first Budget, which it says are needed to tackle an in-year public spending overspend of nearly £22bn.
Rachel Reeves, chancellor, has signalled that taxes will have to rise in the October 30 Budget, alongside tough decisions on spending and welfare, as the government attempts to strengthen the public finances.
In the most recent Budget, under the previous Conservative administration, debt stood at 98.1 per cent of GDP — its highest level since the early 1960s.
“In addition to the inevitability of further shocks, governments in the UK and around the world face a number of longer-term pressures that are likely to weigh on their public finances further,” the OBR report said.
The watchdog found that a sustained period of tighter budgetary policy would be needed to bring the public finances back to a more healthy state. On its central projection, pulling debt back towards pre-pandemic levels would require an average budget clampdown of 1.5 per cent per decade over the half-century period.
The debt surge could be mitigated if the country boosts health outcomes in the population and efforts to limit global warming begin to pay off.
But the biggest gains would stem from successful efforts to lift the economic potential of the economy. Every 0.1 per cent increase in productivity growth reduces the rise in the debt-to-GDP ratio by 25 percentage points, the OBR calculated.
As such, a 1 percentage point increase in productivity growth, which would take increases back to rates seen before the financial crisis, could keep debt below 100 per cent of GDP throughout the next 50 years.
Darren Jones, chief secretary to the Treasury, said the OBR report revealed the public finances to be in a “shocking state”.
He added: “That’s why this government began work immediately to address the inheritance with tough choices on spending alongside ambitious action to drive growth. By fixing the foundations, we will rebuild Britain and make every part of the country better off.”
The OBR singled out three longer-term pressures on the UK public finances, an ageing population and rising geopolitical tensions. The latter add to spending as the government aims to raise defence spending to 2.5 per cent of GDP.
An ageing population, with a falling birth rate and the “baby-boomer” cohort moving through retirement, was likely to hit revenues and push up spending, it said.
The UK population is projected to increase by 13mn people by 2070, with two-thirds of this expansion among those aged 65 or older, the age at which health costs per person begin to rise sharply.
Climate change, including the fiscal costs of completing the transition to net zero while also coping with damage from rising temperatures and more severe weather, was likely to raise public debt between 20 and 30 per cent of GDP, the OBR warned.
