The UK’s public finances are in a “very risky” period after a series of shocks left it in a “vulnerable position” to tackle an ageing population, the UK fiscal watchdog has warned.
The Office for Budget Responsibility (OBR) suggested that “unsustainable” debt levels meant the government was facing further tax rises or significant cuts to spending.
The watchdog said Britain’s state finances have been badly shaken by a triple shock from the Covid pandemic, the war in Ukraine and the cost of living crisis – causing public debt to balloon.
The government’s debt pile grew to more than 100 per cent of annual GDP (gross domestic product) in May for the first time since 1961.
And the OBR said public debt could surge to more than 300 per cent of economic output by the 2070s.
Rishi Sunak’s government has committed to bringing debt down as one of its five pledges, and the watchdog has said this debt is set to decline by 2027-28 as a result.
The OBR said higher interest rates and inflation could put pressure on efforts to reduce this debt but did not alter its previous forecast from March, which showed the government would meet this fiscal pledge.
However, the OBR has cautioned that pressures from the ageing population, climate change and geopolitical issues are likely to reverse this trend dramatically in the longer term.
OBR chairman Richard Hughes said: “It is clear that current policy settings aren’t sustainable left where they are,” raising the prospect of further tax rises or spending cuts by the end of the decade.
Jeremy Hunt is under pressure from Tory MPs to bring in tax cuts
In response, chancellor Jeremy Hunt said: “This highlights why it is important to deliver on the prime minister’s priority to get debt falling and to control borrowing to avoid adding inflationary pressures and risk prolonging higher inflation.
“That means taking difficult but responsible decisions on the public finances, including public sector pay, because more borrowing is itself inflationary.”
Shadow chancellor Rachel Reeves said: “This report shows just how far we are falling behind our peers, how exposed our economy is, and again highlights that the government is failing to take action in areas like energy security to help get bills down.
“It tells you all you need to know that the cost of government borrowing has risen faster in the UK than elsewhere in the G7 and faster than at any time in the last 40 years.”
The OBR also said that long-term sickness will cost the state a further £6.8bn this year as the number of Britons unable to work due to illness has surged after the pandemic.
The forecaster said there was a 440,000 increase in those unable to work and a 490,000 rise in workers with ill health but in work claiming health-related benefits.
The OBR added: “While the disruption to and difficulties in accessing NHS services may have played a role in the worsening physical and mental health of the working-age population during this period, tackling the NHS waiting list alone is likely to make only a modest difference in the number of people out of work.”
Chris Thomas, head of the IPPR (Institute for Public Policy Research) think tank’s commission on health and prosperity, said the recognition that higher sickness levels are a fiscal risk is a “watershed moment” for the economy.
He said: “Today, the OBR has concluded that better health is one of the clearest paths to prosperity in the UK – but that, through a decade of austerity, a global pandemic and an NHS crisis, the UK is off-track and well behind other comparable countries.
“On the same day, NHS waiting lists have hit new highs, and the NHS in England has admitted it may not meet the PM’s pledge to reduce these before the next election.”
