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UK households face tax hikes to stop ‘unsustainable’ debt burden

·Finance Reporter, Yahoo Finance UK
·2-min read
tax People walk on London Bridge, the day after a national rail strike, during six days of travel disruption, in London, Britain, June 22, 2022. REUTERS/Peter Cziborra
UK households and companies face tax hikes to contain the debt burden. Photo: Peter Cziborra/Reuters

Future UK governments will have to raise taxes or find ways to cut billions in spending in order to contain an “unsustainable” debt burden, the fiscal watchdog has warned.

The Office for Budget Responsibility (OBR) said debt is on track to reach almost 320% of GDP in 50 years’ time, more than three times its current level, unless fiscal policy is tightened.

To bring 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”.

Read more: British Airways cancels thousands more flights until October

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

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

If it continues extending this support in its energy price spike scenario, then government borrowing would surge by £40bn in 2023-24.

"Factoring in a stylised estimate of the asymmetric costs associated with inevitable periodic shocks would push debt up to ... nearly 320% GDP in 50 years. These figures are based on a simple reading of post-war UK fiscal history," the OBR said.

Soaring energy prices and rocketing inflation also threaten to tip the UK into recession, hitting household finances.

Read more: Bank of England's Huw Pill backs rapid interest rate rises

The fiscal watchdog said that gas prices temporarily spiking at £7 a therm and oil prices peaking at 147 US dollars a barrel would see inflation reach 11% and push the economy into a recession, as defined by two consecutive quarters of falling output.

In its fiscal risks and sustainability report, the OBR said this scenario would see GDP fall 4% below its baseline scenario, before quickly recover as energy prices fall.

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

Watch: What is a recession and how do we spot one?