Britain’s public finances are facing an unsustainable trajectory and are rapidly deteriorating, according to a report by the UK Treasury’s fiscal watchdog. The Office for Budget Responsibility (OBR) highlighted the need for multi-billion-pound spending on defense, climate change, and healthcare. The report warns that British public debt could exceed 300% of gross domestic product (GDP) by 2072-73, a scenario considered “optimistic” considering potential future shocks. To prevent debt from surpassing its current level of 100% of GDP, which is already the highest since the 1960s, tax increases and spending cuts of 4.4% of GDP would be necessary by 2028-29.
Richard Hughes, the chair of the OBR, emphasized that the pressures on the public finances have significantly increased since the last projections were made. He stated that these pressures are mounting more rapidly in the UK compared to other countries, meaning that rising interest rates will constrain the country’s finances more quickly than in the US, France, and Germany. The report underscores the challenges faced by Prime Minister Rishi Sunak’s government, as voters demand improvements in strained services while the public finances are already stretched. Additionally, Sunak is under pressure from members of his own Conservative Party and business groups who are advocating for tax cuts.
The OBR’s assessment of the country’s long-term finances is bleak. It estimates that retiring baby boomers and higher inflation will cause the country’s pensions bill to rise by £23 billion (€27 billion) by the 2027-28 fiscal year compared to the beginning of the decade. The shift to electric vehicles is expected to reduce fuel duties by £13 billion per year by 2030, while public investment to support the transition to net zero emissions may cost £17 billion per year by that time. The OBR also predicts that defense spending may need to increase by £13 billion per year in today’s terms due to the outbreak of war in Ukraine and growing security threats in Asia, reaching 2.5% of GDP from the current 2%.
The OBR warns that the public finances are on a “very risky” footing, having been subjected to a series of shocks including the COVID-19 pandemic, the war in Ukraine, and soaring interest rates. It states that the UK’s finances are more vulnerable than those of many other advanced economies. The OBR highlights several factors that contribute to this vulnerability, such as the Treasury’s higher proportion of inflation-linked debt compared to its peers, shorter maturities, and the sharpest increase in borrowing costs among the Group of Seven nations over the past year. Additionally, the UK has a larger portion of its debt held by foreign investors, leaving it susceptible to shifts in global sentiment.
Richard Hughes commented on the challenges faced in the past decade, stating that the series of shocks has accelerated fiscal pressure. He described the 2020s as a “very risky era for the public finances.” The report serves as a stark reminder of the difficult balancing act that the UK government must navigate in order to address the demands for improved services while grappling with a strained fiscal situation.
Source: Bloomberg