The six starkest warnings from OBR as report lays bare the perilous state of UK public finances

The government spending watchdog set alarm bells ringing in the Treasury on Tuesday with the release of a report laying bare the perilous state of Britain’s public finances.

The Office for Budget Responsibility (OBR) said spending, borrowing, and the size of the government debt pile are all set to soar in the decades to come.

It blamed the government’s inability to commit to tax hikes and spending cuts, a nod to Sir Keir Starmer’s recent welfare U-turns, but laid out a wider set of warnings about the dangerous path ahead for the government.

The Independent looks at the six starkest warnings in the OBR’s report.

Britain’s public finances have been left in a “relatively vulnerable position” by successive governments, the OBR warned.

It blamed the “major shocks” of the Covid pandemic and energy crisis in the wake of Vladimir Putin’s invasion of Ukraine for the scale of the increase in debt since 2010.

But it also said efforts to return the public finances to a more sustainable footing “have met with only limited and temporary success in recent years”.

It said debt has continued to rise because successive governments reversed planned tax rises and, pointing to Sir Keir’s recent U-turns, abandoned public spending cuts.

The OBR also highlighted the threat of climate change to Britain’s economy, warning that it “poses significant risks” to GDP.

The watchdog said the costs of mitigating the impact of climate change, repairing the damage it causes and adapting to new weather extremes were all likely to affect government spending and the wider economy.

There is “an increasing likelihood of more severe impacts of climate change on economies”, the OBR said, as the latest analysis now accounted for “the impacts of higher precipitation and temperature variability”.

As a result, the OBR has updated its estimates for the economic damage caused by climate change in both its best case scenario – 2C of warming – and its worst case, an increase of 3C.

GDP could fall by 3.3 per cent by 2060 in the event of 2C warming, the watchdog said, and 7.8 per cent by 2060 in the 3C scenario.

The cost of the state pension triple lock is set to be three times higher by the end of the decade than its original estimate, the OBR said.

It said the cost of the state pension has “risen steadily over the past eight decades”, from around 2 per cent of GDP in the mid-20th century to the current 5 per cent of GDP, or £138bn, and is estimated to rise to 7.7 per cent of GDP in the early 2070s.

The triple-lock guarantee, first implemented in 2011, means the state pension increases year-on-year by the highest of three measures. These are:

Demographic changes – more people living longer, healthier lives – and the triple lock up-rating mechanism are among the drivers for the continued rise, according to the OBR.

It added: “Due to inflation and earnings volatility over its first two decades in operation, the triple lock has cost around three times more than initial expectations.” The state pension triple lock is expected to have cost an additional £15.5bn per year by the end of the decade.

In one of the most stark warnings in the report, the OBR said that the pressures of Britain’s ageing population, rising healthcare costs and other age-related spending would see government debt soar to unprecedented levels.

The OBR said borrowing will soar to more than 20 per cent of the size of the economy, while the debt pile is expected to surpass 270 per cent of GDP by the early 2070s.

The OBR said Britain’s support through Covid and the energy crisis after Russia’s invasion of Ukraine was relatively generous compared to advanced economies. And it cited the shocks as part of the reason the debt pile has grown so much.

But it warned that, as a result, Britain’s ability to respond to future shocks has been substantially eroded.

“The government has left itself very small margins against its objectives of restoring the current budget to balance and getting net financial liabilities to fall by the end of the decade,” the OBR said.

But it warned that, despite pressure on the public finances, the public expectation of how much government support should be available appears to be growing.

The OBR said one of the biggest increases in risk since its last report has come from “rising geopolitical tensions” and global tariff rates being hiked to their highest level in more than a century.

As well, European leaders have been put under significant pressure to hike defence spending to post-Cold War highs.

Both have been pushed through by Donald Trump since his re-election, highlighting the scale of the challenge the US president has posed for the chancellor.

Source: UK Politics - www.independent.co.uk