(July 7): Andy Burnham faces a £100 billion challenge if he wants to put Britain’s public finances on a sustainable path, the government’s fiscal watchdog warned.
In its annual assessment of the 50-year outlook, the Office for Budget Responsibility said that simply maintaining the national debt at its current level of 95% of GDP would require tax rises and spending cuts “equivalent to total onshore corporation tax receipts", which it projects will be £101.4 billion this year.
With Burnham expected to replace Keir Starmer as prime minister later this month, the OBR urged the Labour government not to delay. “The longer debt is allowed to rise, the greater the risk of a sudden adverse investor reaction,” it said in its Fiscal Risks and Sustainability Report. “Unsustainable fiscal outcomes that may not occur for some years are today’s challenge, not tomorrow’s.”
Burnham has raised concerns by arguing last year that the UK should not be “in hock” to the markets, even though he has subsequently rowed back on the comments. Investors have also expressed concerns about the potential appointment of Ed Miliband as chancellor of the Exchequer.
The OBR is an arms-length, independent body whose principal job is to produce five-year forecasts alongside the chancellor’s budget, which are used to gauge whether the government is meeting its self-imposed fiscal rules.
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“The UK’s public finances are currently in a challenging position relative to history and to other similar countries, with government debt having increased by one of the largest shares of GDP of any advanced economy over the past two decades,” the OBR said.
In recent months, the watchdog has found itself in the eye of a political storm, as many UK lawmakers argue that its forecasts impose an unacceptable constraint on government policy and, therefore, on the democratic process. The OBR has countered that it is only operating within its remit and its five-year forecasts have tended to be over-optimistic.
It is required to produce an assessment of the 50-year outlook every year. In its latest publication, it warned that the cost of an ageing population — through health demands and generous state pension arrangements — will put the public finances under immense strain. Higher defence spending and dwindling fuel duty receipts, as the drivers move to electric cars, will also hammer the public purse, with debt projected to rise to 300% of GDP by 2075-76 from 95% of GDP today.
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The situation cannot be rescued by increasing the population. “That doesn’t hold up,” said David Miles, the OBR’s chief forecaster. In a scenario in which it assumes the native population remains stable, with a higher birth rate and lower death rate, and migration increases the population by nine million by 2075-76 from around 70 million today, the national debt rises even further.
“This reflects higher spending on education initially, due to the higher birth rate, and then higher health and state pension spending from the 2050s as larger numbers of people move into older age groups compared to the baseline,” the OBR said. “This alternative scenario illustrates that maintaining a larger population through increased birth rates and lower death rates does not relieve pressure on the public finances.”
The OBR made a number of proposals to keep a lid on the spiralling debt burden.
- The state pension “triple lock” — that guarantees it rises in line with the highest of inflation, earnings or 2.5% — could be changed to rise only in line with earnings. That would see state pension spending rise to 7% of GDP in 2075-76, rather than 9% of GDP, from 5% today.
- Raising the standard uprating in income tax thresholds with inflation rather than earnings would generate significant sums — but also drag around two-thirds of earners into the 40% higher rate bracket. That would mean “someone earning the minimum wage sometime in the 2050s would be a higher rate taxpayer", Miles said. Thresholds are currently frozen until 2031.
- Raising non-state pension welfare payments in line with inflation, rather than earnings, would halve the annual bill to around 3% of GDP but there would be poverty impacts that the OBR said were “beyond the scope of this analysis".
- Improving productivity in the National Health Service and the wider economy.
To return the national debt to 2008 pre-financial crisis levels of around 40% of GDP, the government would need to do another £150 billion of consolidation on top of the £100 billion identified to stabilise the debt from 2031-32 onwards, the OBR said.
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