Britain faces a “daunting” task of managing its public finances in the coming decades, declared the country’s independence fiscal watchdog today, as it warned that a soaring debt mountain has “substantially eroded” the UK’s ability to respond to future economic shocks.
In a sobering new report, the OBR noted that Britain now has the sixth-highest national debt, fifth-highest deficit and the third-highest borrowing costs of any of the world’s 36 advanced economies.
In Britain, and indeed most of these other global economies too, rising debt isn’t a problem that’s going away anytime soon.
On the contrary, the OBR predicts that spending pressures will push UK public debt from its current levels (around 100 per cent of GDP) to above 270 per cent of GDP by the early 2070s.
As for key drivers of increased public spending, the OBR acknowledges the enormous financial pressure of an “ageing population” when it comes to increased health and social care costs, as well as the strain placed on state pensions. In the 1950s, the state pension accounted for 2 per cent of GDP; since then it has climbed to 5 per cent and within 50 years, the OBR projects that it will cost nearly 8 per cent. The triple lock on pensions is forecast to cost £15.5 billion annually by 2029-30, around three times higher than initial expectations.
As Ian Stewart wrote recently in Reaction, the unmistakable trend in the last 25 years has been bigger government. Higher health spending is by some way the biggest single driver of the post-2000 expansion of the state, accounting for well over a third of the increase in spending. Social security, through higher spending on pensions, disability benefits and working age benefits, accounts for 16% of the uplift. Rising debt financing costs, due to higher levels of bond yields, account for a similar share.
This growth of the state partly reflects political choices – the first big boost, for instance, came in the early 2000s when the Blair government raised public spending, increasing debts. Yet it is also down to a series of crises including the Global Financial Crash, Covid and the energy shock.
One of the big problems for today’s government is that higher spending places a larger strain on the public purse than it once did. Blair’s decision to raise public spending, for instance, came against a backdrop of relatively strong economic growth, making higher spending more affordable.
As the OBR points out, addressing the issue today has become “considerably more challenging” thanks to the end of the ultra-low interest rate era and Britain’s dismal growth prospects.
Amid various government U-turns and downgraded economic forecasts, tax rises in the Reeves’s Autumn budget are now deemed inevitable to plug the widening fiscal gap. Though they in turn risk further stifling growth.
What’s more, the cost of borrowing has soared because long-term gilt yields are now higher in the UK than at any time since the start of the century. Meaning Britain risks entering a doom loop in which the government cannot afford to service its debt load, which will in turn only continue to mount.
One of the most frustrating parts of all is that high levels of public spending don’t seem to be delivering better services. On the contrary, according to the British Social Attitudes Survey, satisfaction with the NHS – despite being a priority for successive governments during these decades of rising debt – fell to a record low last year.
Caitlin Allen
Deputy Editor
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