The UK’s debt mountain will almost triple to more than 270% of national income over the next 50 years because of pressures from an ageing population, the climate crisis and security risks, the public finances watchdog has warned.
In a report that lays out the main risks to government tax and spending into the second half of the century, the Office for Budget Responsibility (OBR) said the size of the national debt had tripled since the turn of the millennium and would rise threefold again by 2070.
The report said increasing debt levels affected all developed economies as they struggled to cope with competing demands on the public purse in a time of frequent global shocks.
“It is hard to escape the conclusion that the world is becoming a riskier place,” the OBR said. “And for fiscal policymakers, the costs associated with those risks seem to be rising, too.”
The report said domestic pressures were adding to the costs faced by governments: “Public finances are now under growing pressure from ageing populations, disappointing economic growth, a warming planet, and rising geopolitical tensions. Amid these pressures, many governments have struggled to rebuild their fiscal resilience during the increasingly brief interludes between global crises.
“In practice, if these pressures and shocks were to materialise as we project, then governments would need to take mitigating policy action to prevent this debt spiral from occurring.”
However, the OBR said higher personal taxes imposed by Conservative and Labour governments would limit the size of public sector borrowing over the next 50 years, bringing down the estimated ratio of debt to gross domestic product from last year’s projection of 310%.
More modest increases in life expectancy over the forecast period were expected to reduce the costs of looking after older people, compared with previous estimates, and a sharp decline in the fertility rate would ease the cost of providing children’s services.
Under a less benign scenario that included the risk of further pandemics and a failure to tackle the climate crisis, debt could still accelerate to 385% of GDP.
The UK’s borrowing as a proportion of national income has increased since beginning of the century.
Tight restrictions on public spending in the first two years of Tony Blair’s first administration generated budget surpluses that brought debt levels down before a succession of deficit budgets, culminating in a shortfall of almost 10% of national income after the 2008 financial crash.
The OBR said it had also examined the threat to the public finances from the damage caused by the climate crisis and the rising number of people leaving the workforce.
Richard Hughes, the chair of the watchdog, said there were many policies that could improve the government’s debt position, including investments in mental health services. This would help people to live happier lives and return to the workforce, which in turn would lead to them paying more tax and using the health service less frequently.
“The kinds of interventions that improve wellbeing, especially concerning mental health, can have a decisive impact on GDP as well as on the public finances over the next 50 years,” Hughes said.
Without any changes to current tax and spending policies, and the likelihood of another health pandemic damaging the economy, the annual interest repayments on government debts is expected to rise from about £80bn today to £240bn by 2070 in today’s money, further increasing the debt pile.
Moving on to the climate crisis, the OBR said a rise in temperatures of less than 2C on pre-industrial levels could have a similar economic impact on the UK as Brexit, reducing output over the long term by 3%. Brexit was considered to have reduced output by 4%. A 3% rise in global temperatures could reduce UK output by 5%, the OBR report added.
The chief secretary to the Treasury, Darren Jones, said: “The OBR has laid bare the shocking state that our public finances were left in by the previous government. Highest debt since the 1960s, highest taxes since the 1940s, and debt on track to be almost three times our GDP.
“That’s why this government began work immediately to address the inheritance with tough choices on spending alongside ambitious action to drive growth. By fixing the foundations, we will rebuild Britain and make every part of the country better off.”
Gareth Davies, the shadow exchequer secretary, said that to ensure the continued sustainability of the public finances, “the Labour government must come forward with a plan to reform welfare, improve public sector productivity and drive growth”.
He added: “Instead, they are fabricating a narrative on their inheritance to make way for reckless tax rises they had planned all along that will hamper the economy.”
