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Tax rises needed as UK on ‘unsustainable’ debt path, watchdog warns

·3-min read

Britain’s public finances are already on an “unsustainable path”, with government debt levels at risk of more than trebling and tax increases needed to offset rising cost pressures, the UK fiscal watchdog has warned.

The latest report from the Office for Budget Responsibility (OBR) deals a blow to the hopes of Boris Johnson’s potential successors to promise a raft of tax cuts in response to the cost-of-living crisis.

The OBR said the UK Government has already spent as much this year – 1.25% of gross domestic product (GDP) – to help households cope with the cost squeeze as it did supporting the economy through the financial crisis.

In its fiscal risks and sustainability report, the OBR predicts that debt could rise from 96% currently to more than 100% of GDP by 2052-53 and reach 267% of GDP in 50 years if upward pressures on health, pensions and social care spending, and the loss of motoring taxes, are factored in.

It warned that debt could jump by nearly 320% in 50 years’ time, with future shocks taken into account and without fiscal policy being tightened.

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”.

This would amount to 1.5% of GDP, or £37 billion a year, of additional tightening at the beginning of each decade over the next 50 years, its report showed.

The OBR said the reversal of any of tax increases announced by former chancellor Rishi Sunak – such as the health and social care levy and the planned corporation tax increase – would “put more pressure” on creaking public finances.

It will come as a stark warning to the new Chancellor, Nadhim Zahawi, who said in his first day in the job that he would review Government plans to increase corporation in the tax next year.

The OBR said geopolitical tensions, soaring energy costs and long-term pressure on the nation’s finances from an ageing population “add up to a challenging outlook for this and future governments as they steer the public finances through inevitable future shocks”.

It outlined energy price scenarios and their impact on the economy over the next five years, warning that if the current surge in energy prices ramps up temporarily next year, then inflation would soar into double figures and peak at 11% in the third quarter of 2023, pushing the economy into a recession, as defined by two consecutive quarters of falling output.

The OBR said this scenario would see GDP fall 4% below its baseline scenario, with household finances dropping just over 4% after inflation, before the economy quickly recovers as energy prices fall back.

Government measures to tackle the crisis would add £30 billion to public debt in 2023-24 and £63 billion by 2026-27, it estimated.

The OBR said if the Government continues extending current support in this price increase scenario, then borrowing would surge by £40 billion in 2023-24.

In its “persistent shock” scenario, where energy prices surge by less but remain at high levels, the economy’s productive potential would be weighed on and public finances would be even more unsustainable.

It predicts this could see GDP suffer a 2% hit, the same impact as it expects the pandemic to have.

The OBR said: “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.”

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