Public debt at 300 per cent of GDP is not a forecast Britain can shrug off

The Office for Budget Responsibility has spent the past decade trying to persuade politicians to look beyond the next fiscal event, and beyond the next election, to the quieter mathematics that accumulates in the background. Its latest long-term assessment of the public finances is the sort of document that, in any sensible world, would sit on the prime minister’s desk for more than an afternoon. In the OBR’s central simulations, and in almost all the variants around them, the conclusion is the same: without a decisive shift in policy, Britain’s public debt is on an “unsustainable path”, rising towards 300 per cent of GDP by 2075.

Such a figure has a way of sounding abstract, as though it belongs to an economist’s spreadsheet rather than a country’s lived experience. It is worth translating. Public debt already stands at about 95 per cent of GDP, the highest level outside wartime. The OBR notes that the debt pile has, on average, tripled since the start of this century. The leap to 300 per cent would place the state in a permanent posture of managing its past, paying for yesterday before it can properly pay for tomorrow. It would also mean that small shifts in interest rates, growth and inflation could become politically explosive, because the sums involved would be too large to hide in technical language.

The OBR’s analysis is not a prophecy, and it is careful to present its work as a set of scenarios rather than a crystal ball. It assumes no additional shocks and no changes in policy, which is both its strength and its warning. When even a calm-water baseline delivers a debt ratio that extreme, the burden of proof shifts to those who insist that the country can drift on. The report is, in effect, a test of whether the British political system can acknowledge constraints in advance, rather than only after markets force the issue.

At the heart of the problem is a familiar squeeze. The OBR expects tax receipts to remain broadly stable at about 41 per cent of GDP into the 2070s. In the same period, public spending is projected to rise from around 40 per cent of GDP today to close to 50 per cent. That gap is the story. It reflects rising demands for health services, social care and pensions as the population ages, while also accommodating pressures that have moved from discretionary to unavoidable: higher defence spending in a more dangerous world and the investment required for the green transition.

One can argue about the precise slope of each line, but the direction is difficult to dispute. Britain is becoming older. Older societies consume more healthcare, require more social support, and ask the working-age population to finance longer retirements. At the same time, the state is expected to protect living standards against shocks, whether those shocks are energy price spikes, pandemics, or the disruptions that come with technological change. These expectations are not unreasonable, but they are expensive, and they clash with a political culture that still struggles to speak plainly about tax.

The report is also explicit about timing. Its starkest warnings apply to the period after 2030. In the nearer term, the OBR says Labour’s announced fiscal policy measures would stabilise borrowing and spending. A key indicator, the primary deficit, which strips out debt interest, is projected to move from a deficit of 1.4 per cent of GDP to a surplus of 1.5 per cent by the end of the decade. The watchdog describes that shift as the biggest budget buffer recorded since 2000, and in narrow accounting terms it matters: primary surpluses are the basic condition for stabilising a debt ratio when interest costs are manageable.

Yet the OBR immediately undercuts any temptation to treat those numbers as reassurance. Governments routinely plan to tighten policy later in a parliamentary term and then fail to do so, whether through political choice or economic misfortune. This is the quiet pattern of modern fiscal policy: restraint is promised in the future because it offends fewer people in the present, and then the future arrives with its own urgencies. The result is that consolidation plans become a kind of political theatre, credible enough to be announced, fragile enough to be dropped.

That observation has a particular bite in the current political moment described in the article. Labour’s fiscal stance has been shaped by Rachel Reeves and her insistence on rules designed to reassure markets that the party will not embark on unfunded largesse. The Times reports that Reeves is likely to lose her job should Andy Burnham become prime minister this month, though Burnham has said he will stick to Reeves’s fiscal rules and Labour’s manifesto promises on tax until a new election. The OBR’s point is not a comment on personalities; it is a warning about incentives. Leadership changes, internal party bargains, and the desire to distinguish a new administration from its predecessor are precisely the conditions in which fiscal rules are tested.

Nor is Britain alone in wrestling with these pressures. The report notes that rapidly growing debt burdens are a broader phenomenon. It cites estimates suggesting that the United States, China and Germany will run budget deficits in the 2030s that exceed the peaks reached during the financial crisis of 2008-09. If major economies all try to borrow heavily at the same time, the world becomes less forgiving. The era in which governments could borrow enormous sums at negligible cost may not return quickly, particularly if geopolitical instability keeps inflation risks alive and pushes defence budgets upwards.

For British policymakers, this international context removes a comforting assumption: that if the arithmetic becomes difficult, the world will be awash with cheap money. Debt sustainability is partly a function of interest rates, and interest rates are not set in Whitehall. A country with a large and rising debt ratio becomes more exposed to shifts in global conditions, and therefore more exposed to the politics of credibility. The danger is not merely higher interest costs, but a vicious circle in which rising servicing costs shrink fiscal room, provoking rushed decisions that further weaken confidence.

The OBR returns repeatedly to the variable that determines whether long-term budgets look manageable: productivity. Productivity growth is the foundation of rising living standards, and by extension of rising revenues without politically painful tax increases. The watchdog assumes annual productivity growth of 1.4 per cent over the next five decades. That estimate is materially higher than the performance since the financial crisis, when productivity growth in Britain has dropped from around 1.7 per cent to below 0.5 per cent in recent years. The implication is plain. Even the OBR’s baseline assumes an improvement from recent experience. If the country cannot deliver it, the debt trajectory worsens.

This is where the discussion of artificial intelligence enters the report. The OBR is notably cautious. It does not claim to know whether AI will transform the economy or disappoint. Instead it considers two channels that matter for the public finances: the potential for AI to increase labour productivity, and the possibility that it substitutes for human labour in a way that erodes the tax base. David Miles, a member of the OBR’s budget responsibility committee, says the productivity assumption incorporates some benefits from AI. Independent estimates of an AI boost range from 0.1 per cent to 0.8 per cent, but the watchdog declines to endorse a specific figure while adoption and innovation remain at an early stage.

That caution is prudent, but it also reveals a vulnerability in Britain’s fiscal settlement. The tax system is heavily reliant on labour income. If AI raises productivity chiefly by replacing workers rather than empowering them, income tax receipts could fall even as output rises. The OBR estimates that 10 per cent of the labour force is exposed to job substitution from AI over the next decade. It also argues that just under a third of jobs could be complemented by the technology, meaning it raises workers’ productivity and potentially their earnings. The distinction matters for the Treasury. Complementary change supports wage growth and therefore revenue. Substitution can simultaneously shrink receipts and increase welfare demands.

There is a political corollary. A society asked to accept higher taxes to fund an ageing state may react differently if it also believes that technological change is weakening job security and bargaining power. The OBR notes the risk that AI accelerates a shift from worker power to the power of capital. In practical terms, that means a larger share of national income accruing to profits rather than wages, a trend that would make a labour-heavy tax system progressively less suited to its task. Long-term debt dynamics are shaped not only by growth rates, but by who captures the gains from growth and how they are taxed.

On the question of taxation, the watchdog delivers a message that will frustrate those who reach instinctively for the revenue lever. The UK still has a lower average tax burden than some European peers and members of the G7, but Miles argues that there are growing economic costs to pushing the burden ever higher, because the distortions rise sharply as the overall tax take climbs. He suggests that moving from a tax-to-GDP ratio of 20 per cent to 21 per cent does marginal damage, while moving from 40 per cent to 41 per cent does roughly twice as much damage, and moving from 50 per cent to 51 per cent does more again. The point is not that tax rises are impossible, but that relying on them alone becomes increasingly punishing for incentives to work and invest.

This is where Britain’s debate about the size of the state collides with the arithmetic of demographics. The country has, over two decades, moved closer to European levels of taxation, and Miles notes it is no longer “halfway between” the United States and the continent. That convergence has happened without a full public reckoning about what it implies. A European-style state is funded by European-style taxation, or by borrowing that eventually forces the same conversation in a harsher register. The OBR’s long-term projections are a reminder that the old political promise, generous services with modest taxation, is becoming harder to sustain.

None of this requires a dramatic ideological shift to acknowledge. The choices are, in essence, technocratic. Either the state reforms the drivers of spending growth, particularly in health, social care and pensions; or it raises taxes in a way that tries to minimise economic damage; or it finds a sustained improvement in productivity that outpaces recent history; or it accepts a rising debt ratio and hopes that interest costs remain benign. Most likely it will need some mix of all four. What the OBR is warning against is the British habit of choosing the fourth by default, not as a strategy but as an outcome of avoidance.

There is also a more subtle point embedded in the report’s framing. It treats the green transition and higher defence spending as pressures on the state, but these pressures are, in part, the price of failing to act earlier. Defence costs rise when deterrence and diplomacy have not prevented threats from hardening. Climate costs rise when investment is delayed and the physical consequences of warming begin to demand emergency spending. Long-term fiscal sustainability is therefore tied to the quality of strategic decision-making. A politics that routinely discounts the future will pay for that discounting in higher debt.

The OBR’s role is often misunderstood. It is not there to tell governments what they ought to value. It is there to show what follows from the choices they make, and from the choices they refuse to make. If debt heads towards 300 per cent of GDP under plausible assumptions, the responsible response is not to argue over the exact number, but to treat it as evidence that current policy settings cannot hold indefinitely. Whoever occupies Downing Street after this month, the watchdog’s projections suggest that the next era of economic management will be defined less by the choreography of individual budgets and more by a sustained argument about the shape of the British state, the fairness of the tax system, and the reforms required to keep promises to an older electorate without mortgaging the prospects of a younger one.