OBR: UK debt is unsustainable unless tax and spending are addressed

Treasury’s expenditure watchdog warned that the UK’s public finance is in a “very dangerous” situation, with a debt predicted to rise to over 300 percent of gross domestic products in 50 years.

Office for Budget Responsibility said that the government will need to implement permanent tax increases and spend cuts equivalent to 4.4% of GDP by 2028-29 to avoid debt exceeding 100% of GDP on the long run. It warned that was on an “unsustainable path”, and that it would reach 310 percent of GDP in the mid-2070s if nothing is done.

The report said that while this forecast is “alarming” in itself, it’s likely to be an underestimation and “ignores future shocks for the public finances”. The watchdog said that these could push debt up to 435 percent of GDP within 50 years.

The OBR stated that the 2020s have turned out to be an extremely risky period for public finances. The OBR said that in just three years, they were hit by the Covid Pandemic, which began in early 2020, and the energy and cost-of-living crisis, which began in mid-2021, and the sudden rise in interest rates in 2022.

In its report on fiscal risks and sustainability, the watchdog outlined a number of threats facing Rishi Sunak. Inflation and the retirement of Baby Boomers are expected to increase state pension expenditure by £23 billion by 2027-2028. By 2030, fuel tax will be reduced by £13 billion by switching to electric vehicles. Public spending on decarbonising an economy could reach £17 billion per year.

It added that increasing defence spending could also cost £13 billion per year.

OBR warned that the public finances would be at risk in the long term, due to the increase of people quitting the workforce after Covid because of health issues. The OBR said that the number of people who were inactive due to persistent illness had increased by 440,000 since early this year, and the number of those working but in poor health had increased by 490,000.

The watchdog stated that this will likely lead to an increase in total welfare spending of about £6,8 billion by 2023-24.