Policymakers must act now to prevent public debt rising unsustainably in coming decades as the population ages and defence spending rises, the government’s independent economic forecaster has said in a fresh illustration of the challenges facing the prime minister in waiting, Andy Burnham. The Office for Budget Responsibility (OBR) warned that without government action “debt would move on to what would be an unsustainable, ever-upward path from around the 2040s”.
The warning came as the OBR’s latest fiscal risks and sustainability report laid bare the scale of pressure on the public finances. Defence spending alone would have to increase by an additional £28bn a year – despite the announcement of more funding in last week’s investment plan – to meet the government’s promise to spend 3.5% of GDP. The OBR assumes that pledge will be met.
“OBR warns UK debt unsustainable from 2040s unless action taken on pensions, health and defence.”
Meanwhile, state pension spending could increase from 5% of GDP to 9% over the next 50 years if current policy remains unchanged, the OBR projects – with a third of that shift accounted for by the triple lock, under which pensions increase by the highest of earnings, inflation or 2.5%. Increasing the state pension just on average earnings instead would save 2% of GDP by the end of the period, the forecaster says.
Health spending is expected to go up from 8% of GDP to 13% by 2075, as the proportion of older people in the population increases. The OBR says spending growth could be constrained if productivity in the health sector rises.
While the fiscal plans of the chancellor, Rachel Reeves, are expected to stabilise the debt-to-GDP ratio at about 95% by 2030-31, the OBR’s baseline projection shows it accelerating again from the mid-2030s. Presenting the report, Tom Josephs of the OBR said that could come earlier if the government failed to stick to ambitious plans for narrowing the deficit over the next few years, or if the economy was hit by another big shock. However, stronger economic growth would mean the rise in the debt-to-GDP ratio was “much delayed, and shallower” if the proceeds were used to repair the public finances.
Josephs, a member of the OBR’s budget responsibility committee, emphasised that the earlier action was taken to repair the public finances, the less dramatic the adjustment would have to be. “The significant uncertainty around these projections…” the report noted, though the message was clear: the longer the delay, the steeper the climb.