The Office for Budget Responsibility said that if economic shocks continue to hit public finances, the debt is set to reach almost 320% of annual national income (GDP) in 50 years – from 96% now – unless successive governments raise revenue to offset rising costs. “The spending pressures of an aging population and the loss of existing car taxes in a decarbonised economy leave public debt on an unsustainable path in the long term,” 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 had supported the economy during the financial crisis of 2008. If energy prices remained high next year and ministers continued to extend this support, government borrowing would rise by £40bn in 2023-24. Richard Hughes, the chairman of the OBR, said the UK’s debt had risen by £1trillion more than forecast 20 years ago, following a series of economic shocks – and there was no reason to believe they would stop. Interest rates are already starting to rise, pushing up the government’s borrowing costs, while an aging population is adding extra weight to Whitehall’s spending departments, especially the health service. “Many threats remain, with rising inflation pushing the economy into recession, continued uncertainty over our future trading relationship with the EU, a resurgence of Covid cases, a changing global climate and rising interest rates all continuing to hang in the balance.” from the financial perspectives. ” said the OBR. The switch to electric vehicles in the face of the UK’s promised ban on new petrol and diesel cars from 2030 would be another hit to revenue for successive decades. Fuel duties are now a large source of tax revenue, while domestic electricity is relatively lightly taxed. Undermining claims by some Tory MPs that the tax cuts will boost economic activity and improve the outlook, the OBR warned there was no evidence of this. “Tax cuts do not work on their own and would not improve the long-term economic situation,” said OBR chief of staff Andy King. “In every case that I can think of, when we look at tax cuts, the direct fiscal cost of reducing that tax outweighs the indirect fiscal benefit of improved economic activity.” The OBR’s central forecast shows debt-to-GDP falling over the next 20 years as spending on education falls due to lower birth rates and slower increases in life expectancy reduce spending on state pensions. However, even without successive economic shocks, the UK’s debt-to-GDP ratio is expected to rise to 267% of GDP in 50 years. To bring this back to the pre-Covid level of 75% would require additional tax increases or spending cuts of 1.5% of GDP, or £37bn every decade for the next 50 years, the OBR said. In the worst-case scenario forecasts, debt could reach 430% of GDP in 50 years if Britain increased defense spending to 3% of GDP from 2%, took a major windfall from a cyber attack and faced persistent damage from 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 may demand even higher spending to protect the UK from global military threats. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk Hughes said it was understandable that governments should consider increases in defense spending now that the geopolitical and economic outlook is increasingly uncertain. He said it meant the need to protect public finances was likely to involve more compromises. “Some risks are more uncertain. Energy prices could fall rather than remain high if geopolitical tensions subside. and the process of global economic integration could be revived. And some threats are still largely unknown – like Covid was three years ago,” he said. “But the lesson from the 20 years since the UK published its first long-term report on public finances is that all these risks need to be understood and mitigated if we are to preserve fiscal sustainability in a world that appears to be more and more dangerous”.
