Britain’s spending watchdog has issued a dire warning over the public finances claiming they are in a “relatively vulnerable position”.
In the first major assessment since Keir Starmer greenlighted two major U-turns on welfare in the last month, the Office of Budget Responsibility (OBR) has warned that recent attempts to shore up the government’s balance sheet are only showing limited success.
The health check on the economy will raise further questions about the position of chancellor Rachel Reeves who was in tears during PMQs last week as Sir Keir failed to guarantee her future.
It was only after the markets reacted badly to the uncertainty over who would run the Treasury that the prime minister publicly backed her.
It comes as a YouGov poll has revealed an all time lost approval rating for the government of -54 point – just 13 per cent approve against 67 per cent who disapprove.
The OBR said Sir Keir Starmer’s U-turns on benefit cuts and winter fuel payments were driving the continued increase in government debt.
The decision to cave in to Labour rebels last week and tear up most of the benefits reforms especially for people with disabilities meant that a £5bn saving turned into a small increase.
Meanwhile, the decision to hand back winter fuel payments to millions of pensioners have cost a further £1.25bn.
In a stark warning, the watchdog said debt would hit more than 270 per cent of the UK’s entire economic output by the early 2070s.
The ever-expanding debt pile is causing a “substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances”, the OBR added.
Ms Reeves is scrambling to fill a multi-billion pound black hole in the public finances ahead of her second Budget this autumn.
The chancellor’s headroom against her existing fiscal rules is also vulnerable to any downgrade since the OBR’s last economic growth forecast, which looks likely amid the fallout from Donald Trump’s global trade war.
Trade unions and Labour MPs are piling on pressure for her to introduce wealth taxes on the super rich and big corporations which have been championed in government by deputy prime minister Angela Rayner.
Ms Reeves though has resisted the demands and is also refusing to take the advice of her former adviser Lord Jim O’Neill and others to tear up the election manifesto commitment not to raise income tax, VAT or national insurance for employees.
In its report which will set alarm bells ringing in the Treasury, the OBR said: “The UK’s public finances have emerged from a series of major global economic shocks in a relatively vulnerable position.”
At the end of last year, government debt stood at 94 per cent of GDP, the sixth highest among the world’s advanced economies, while the UK was facing the third-highest borrowing costs in the world.
The OBR said recent attempts to shore up the government’s balance sheet have “met with only limited and temporary success” and “borrowing remained elevated because governments have reversed plans to consolidate the public finances”.
“Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned,” it said.
Amid mounting pressure from backbench MPs, Sir Keir last week ripped up plans to cut £5bn from the welfare bill. He had previously reversed course on a decision to scrap winter fuel payments for millions of pensioners.
The result of the U-turns and spending cuts has been public debt soaring to its highest level since the 1960s, with the OBR forecasting further increases in the medium term.
With economic growth faltering and interest rates rising, halting the increase in national debt “has become considerably more challenging”, the OBR said.
As well as warning about the parlous state of the public finances currently, the OBR highlighted several risks facing the UK, chiefly rising geopolitical tensions.
The watchdog said Mr Trump has overseen the largest increase in effective global tariff rates in more than a century, while simultaneously piling pressure on Sir Keir to hike defence spending as a share of GDP.
The prime minister responded by vowing the biggest increase in defence spending since the Cold War, cutting the international aid budget to spend 2.5 per cent of defence by 2027.
Longer term, the watchdog said 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 Conservatives said Labour has “lost control of the public finances”, with the OBR report laying bare the damage.
Shadow chancellor Mel Stride said: “Britain now has the third-highest deficit and the fourth-highest debt burden in Europe, with borrowing costs among the highest in the developed world.
“Under Rachel Reeves’ economic mismanagement and Keir Starmer’s weak leadership, our public finances have become dangerously exposed – vulnerable to future shocks, welfare spending rising unsustainably, taxes rising to record highs and crippling levels of debt interest.
“Labour’s recklessness risks it all – your pension, your job, your home, your savings.”
The report was also taken as an opportunity by rightwing thinktanks to demand a radical change in economic policy.
The Institute of Economic Affairs (IEA) said: “Two big changes are needed to turn things around. First, the state must become smaller and more efficient. Second, and related to this, productivity has to improve across the whole economy.
“On unchanged policies, public debt is already heading for an eye-watering 270 per cent of national income within 50 years, even if productivity growth recovers to average 1.5 per cent per year.
“But if productivity growth remains weak at around 0.5 per cent, this figure could explode to 647 per cent. That should really set the alarm bills ringing.”
Among age-related spending, the OBR highlighted the soaring state pension bill, which is being pushed up by the growing number of people above the age threshold.
Its report 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.
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 non-earnings-linked element of the lock has been triggered “in eight of the 13 years to date” because inflation “has turned out to be significantly more volatile” than expected, according to the OBR.
It said: “As a result, and despite the suspension of the triple lock for one year during the pandemic, the triple lock is expected to have cost £15.5bn annually by 2029-30, around three times higher than initial expectations.”
