UK government debt on unsustainable path unless taxes hiked, says OBRon July 7, 2022 at 12:08 pm

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Energy prices and an ageing population risk more pressure on the economy, a report warns.

Medical staffImage source, Getty Images

UK debt is on an “unsustainable path” unless spending is tightened and taxes are raised, the government’s independent forecaster has warned.

The Office for Budget Responsibility (OBR) said soaring energy prices and pressures from an ageing population risked tipping the UK into a recession.

Moving away from fossil fuel vehicles to electric ones could also hit tax revenues, the OBR said.

It forecast debt levels could more than treble in 50 years’ time.

High inflation is driving up interest payments. In May they hit £7.6bn, the highest level for that month on record and a £3.1bn jump from a year earlier.

In its fiscal risks and sustainability report, 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 did supporting the economy through the 2008 financial crisis.

The OBR said bringing debt back to 75% of GDP, the level at which it stabilised in the government’s pre-pandemic March 2020 Budget, “would need taxes to rise, spending to fall, or a combination of both”.

“The pressures of an ageing population on spending and the loss of existing motoring taxes in a decarbonising economy leaves public debt on an unsustainable path in the long term,” the OBR said.

The government has pledged to ban the sale of new petrol and diesel-powered cars from 2030. Fuel duties are currently a big source of tax revenue.

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Analysis box by Faisal Islam, economics editor

The Office for Budget Responsibility has for the first time combined its assessment of the sustainability of the government’s finances with risks from wars, trade tensions, cyber attacks and the net zero transition.

The overall picture is a sobering one for whoever takes over in Downing Street – a clear indication that tax rises will be required.

Growth is assumed to be smaller, as the economy is less productive. Long-standing demographic challenges that will raise spending and old age dependency, have become worse, says the OBR, leading to government spending being concentrated on the NHS, social care and pensions payments and other areas of spending being squeezed.

At the same time some sources of tax revenue, such as fuel duty, are on course to disappear entirely.

The OBR also model the risk of today’s energy shock persisting, a major cyber attack, and the need for a significant rise in defence spending to deal with new tensions around the world. The result would be ballooning government debts.

While the portals of political power are focused very much on the short term, the OBR report is a warning of very many future risks, currently gaining little attention.

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The OBR said the Ukraine war, soaring energy prices and long-term pressure on the nation’s finances “add up to a challenging outlook for this and future governments as they steer the public finances through inevitable future shocks”.

“Many threats remain, with rising inflation potentially tipping the economy into recession, continued uncertainty about our future trading relationship with the EU, a resurgence in Covid cases, a changing global climate, and rising interest rates all continuing to hang over the fiscal outlook,” it said.

Households are currently being hit by higher fuel, food and energy costs. Prices are rising at their fastest rate for 40 years, with inflation at 9.1%.

It has led to many people cutting back on spending, especially on food and car journeys, according to a BBC-commissioned survey.

It has also fuelled fears that the UK could fall into recession – defined as the economy getting smaller for two consecutive three-month periods – after the economy shrank in March and April.

But the OBR said the current energy price woes may not be as bad as that seen in the 1970s.

“While the oil crises of the 1970s saw global energy prices rise by a similar magnitude as we have seen in the wake of the pandemic and Russian invasion of Ukraine, there are reasons to believe that the overall impact on inflation, output, and unemployment will be less severe and less persistent this time around,” it added.

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