OBR Warns of Unsustainable Debt Path Without Policy Action

Policymakers must act to prevent public debt rising unsustainably in coming decades as the population ages and defence spending rises, the government’s independent economic forecaster has said.

In a fresh illustration of the challenges facing the prime minister in waiting, Andy Burnham, the Office for Budget Responsibility (OBR) said that without government action “debt would move on to what would be an unsustainable, ever-upward path from around the 2040s”.

The OBR said defence spending would have to increase by an additional £28bn a year – despite the announcement of more funding in last week’s investment plan – to meet the government’s promise to spend 3.5% of GDP.

In its latest fiscal risks and sustainability report, the OBR assumes that pledge will be met. It also cites the rising costs of health and pensions as pressures on the public finances.

State pension spending could increase from 5% of GDP to 9% over the next 50 years if current policy remains unchanged, the OBR projects – with a third of that shift accounted for by the triple lock, under which pensions increase by the highest of earnings, inflation or 2.5%.

Increasing the state pension just on average earnings instead would save 2% of GDP by the end of the period, the forecaster says.

Health spending is expected to go up from 8% of GDP to 13% by 2075, as the proportion of older people in the population increases. The OBR says spending growth could be constrained if productivity in the health sector rises.

While the fiscal plans of the chancellor, Rachel Reeves, are expected to stabilise the debt-to-GDP ratio at about 95% by 2030-31, the OBR’s baseline projection shows it accelerating again from the mid-2030s.

Presenting the report, Tom Josephs of the OBR said that could come earlier if the government failed to stick to ambitious plans for narrowing the deficit over the next few years, or if the economy was hit by another big shock.

However, stronger economic growth would mean the rise in the debt-to-GDP ratio was “much delayed, and shallower” if the proceeds were used to repair the public finances.

Josephs, a member of the OBR’s budget responsibility committee, emphasised that the earlier action was taken to repair the public finances, the less dramatic the adjustment would have to be.

“The significant uncertainty around these projections should not be used as an excuse for inaction. Unsustainable fiscal outcomes that may not occur for some years are today’s challenge, not just tomorrow’s,” he said.

Josephs said the shift required would have to be twice as large if implemented in the middle of the century, rather than the early 2030s. “Doing this earlier would be less costly than delaying the required fiscal adjustment,” he added.