The Office for Budget Responsibility has warned that UK public debt could rise to 300% of GDP over the next half-century, due to rising costs linked to climate change and an ageing population.
In its latest report on long-term fiscal risks, the independent watchdog warned that current policy choices and future spending pressures are putting public finances on an unsustainable path.
The Office for Budget Responsibility expects public spending to rise from 45% to over 60% of GDP by 2073, while government revenues are expected to hover around 40% of GDP. Under the baseline scenario, the Office for Budget Responsibility projects public debt to reach 274% of GDP by the late 2030s, its highest level outside wartime conditions, with a potential peak of 300% in scenarios involving additional geopolitical shocks.
The stark forecast comes ahead of the next government budget, when tough decisions on taxation and spending will be needed. The report highlights the long-term fiscal challenges facing future governments, particularly as the UK seeks to meet its commitment to net zero emissions by 2050 and deal with the demographic shift towards an older population.
David Miles, a member of the OBR’s budget committee, stressed the need to address these fiscal pressures, warning that the current borrowing trajectory was “unsustainable” and risked destabilising the economy. “You can’t expect the rest of the world to continue buying up UK debt that is rising at an increasingly rapid rate,” Miles said, highlighting the need for a comprehensive policy overhaul.
The shift to a green economy is expected to have significant fiscal implications, especially as fuel tax revenues – a major source of government revenue – fall with the rise of electric vehicles. The Office for Budget Responsibility estimates that fuel taxes, which currently contribute about 1% of GDP, would fall to just 0.1%, adding 20 percentage points to the national debt, even if a comprehensive carbon tax were implemented. However, if new car taxes were introduced to replace fuel taxes, the debt impact could be mitigated by up to 12 percentage points.
The report also stresses the crucial role that productivity growth plays in easing fiscal pressures. The OBR assumes that even a modest increase in productivity could significantly reduce the expected rise in debt, with a 0.1% improvement in the debt-to-GDP ratio potentially reducing by 25 percentage points over the coming decades. However, productivity growth in the UK has been slow recently, averaging just 0.5% a year over the past 15 years, compared with pre-2008 rates of over 2%.
In the face of these challenges, the OBR warns that future governments will need to take decisive action, including tax increases, spending cuts and pursuing policies to stimulate productivity growth. The report also points to the potential impact of immigration as a short-term fiscal boost, with higher-than-expected net migration expected to increase the UK population from 68 million to 82 million by 2074.
But as migrants age, the initial fiscal benefits are set to diminish, posing additional challenges to the UK’s long-term fiscal outlook. As the government prepares to deliver its first budget, the OBR findings highlight the difficulty of striking the right balance between ensuring public finances are sustainable while supporting economic growth and meeting the demands of an ageing society.