Public finances on ‘unsustainable' path due to spending promises, says OBR

Yahoo

a day ago

The UK's state finances are on an 'unsustainable' path due to a raft of public spending promises the Government 'cannot afford' in the longer term, the boss of UK's official forecaster has warned.
It came as the Office for Budget Responsibility said public finances are in a 'relatively vulnerable position' amid pressure from recent U-turns on planned spending cuts.
State finances are facing 'mounting risks' but recent governments have had only limited success in improving the fiscal outlook, the OBR said.
Richard Hughes, chairman of the organisation, indicated that governments will need to adjust spending plans in the longer term to avoid national debt ballooning.
Downing Street however rejected suggestions that the Government is failing to heed warnings about the future of the public finances.
Mr Hughes told a briefing in Liverpool that the projected rise in state pension spending linked to the triple lock commitment for annual increases was contributing to growth in national debt.
He said the triple lock 'is one of a series of age-related pressures that pushes public spending upwards steadily over a number of years and, as you saw in our previous report, when you project trends in both pension spending and health and other age-related spending forward, the UK public finances are in an unsustainable position in the long-run.
'The UK cannot afford the array of promises that are displayed to the public if you just leave those unchanged, based on a reasonable assumption about growth rates in the economy and in tax revenues.'
The triple-lock, which means state pensions increase by the highest of inflation, earnings growth of 2.5%, and a larger number of people above the pension age have caused a surge in spending on state pensions.
The forecaster said the cost of the state pension has 'risen steadily over the past eight decades', from around 2% of GDP in the mid-20th century to the current 5% of GDP, or £138 billion, and is estimated to rise to 7.7% of GDP in the early 2070s.
It added: 'Due to inflation and earnings volatility over its first two decades in operation, the triple lock has cost around three times more than initial expectations.'
The OBR's annual fiscal risks and sustainability report suggested reversals of planned tax increases and spending reductions, such as the recently proposed welfare Bill and winter fuel allowance cuts, contributed to a continued rise in Government debt.
The report said: 'Efforts to put the UK's public finances on a more sustainable footing have met with only limited and temporary success in recent years in the aftermath of the shocks, debt has also continued to rise and borrowing remained elevated because governments have reversed plans to consolidate the public finances.
'Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned.'
UK public sector debt stood at 96.4% of GDP (gross domestic product) in May, according to latest figures from the Office for National Statistics (ONS).
The OBR said its annual fiscal risks and sustainability report that debt is projected to be 'above 270% of GDP by the early 2070s'.
The forecaster added that recent rises in debts have led to 'a substantial erosion of the UK's capacity to respond to future shocks and growing pressures on the public finances'.
The report also indicated that the state finances are likely to come under pressure in the longer-term from issues including significant growth in the cost of state pensions and climate-related factors.
The OBR report also highlighted that the UK's finances faces 'daunting' risks in the near term, such as challenging conditions across the global economy, which have pushed up borrowing costs for governments.
The yield on long-term UK Government bonds, called gilts, currently sits near to record highs, making it more costly for the Treasury to pay down its debt bill.
It also highlighted that commitments for increased defence spending also pose another risk to the sustainability of public finances.
Meeting the new Nato target that countries should spend 3.5% of GDP on core defence by 2035 will increase spending by a further £38.6 billion, the report said.
Another major risk highlighted is potential cyber attacks, in light of recent assaults on the Legal Aid Agency, HMRC and Marks & Spencer.
It predicted that a cyberattack on critical national infrastructure has the potential to temporarily increase borrowing by 1.1% of GDP.
Climate change also 'poses significant risks to economic and fiscal outcomes in the UK'.
There is 'an increasing likelihood of more severe impacts of climate change on economies', the OBR said, as the latest analysis now accounted for 'the impacts of higher precipitation and temperature variability'.
As a result, the OBR has updated its estimates for the economic damage caused by climate change in both its best case scenario, 2C of warming, and its worst case, an increase of 3C.
GDP could fall by 3.3% by 2060 in the event of 2C warming, the watchdog said, and 7.8% by 2060 in the 3C scenario.
A Number 10 spokesman said: 'We recognise the realities set out in the OBR's report and we're taking the decisions needed to provide stability to the public finances.'
Asked whether the Government was failing to heed alarm bells being sounded by the Office for Budget Responsibility (OBR), the official said: 'No, I don't accept that.
'We have non-negotiable fiscal rules. Stability is the bedrock of growth as we've always said and that is why those fiscal rules are in place.
'But we recognise the long-standing economic realities the OBR sets out in its report.'
The Conservatives criticised Labour's handling of the economy amid warnings from the OBR about the unsustainable future of public finances.
Shadow chancellor Mel Stride said: 'While working families are tightening their belts, Labour have lost control of the public finances.
'The OBR's report lays bare the damage: Britain now has the third-highest deficit and the fourth-highest debt burden in Europe, with borrowing costs among the highest in the developed world.
'Under Rachel Reeves' economic mismanagement and Keir Starmer's weak leadership, our public finances have become dangerously exposed – vulnerable to future shocks, welfare spending rising unsustainably, taxes rising to record highs and crippling levels of debt interest.'