- OBR Identifies Significant Threats: Climate change, defense, and longer lifespans pose risks to UK public finances
- National Debt Projection: Treasury report warns national debt could reach 300% of GDP by 2070s
- Challenging Decade for Public Finances: COVID, energy crisis, interest rate hikes contribute to deepest recession, high borrowing costs, and increased debt servicing costs
In addition to the Treasury’s current inflation-driven issues, the Office for Budget Responsibility identifies “significant” threats to the public finances, ranging from climate change to defense.
According to a report from the Treasury, the UK’s national debt could reach 300% of GDP by the 2070s as a result of a “rapid succession of shocks” and a string of major challenges still confronting national governments.
The independent Office for Budget Responsibility (OBR) outlined how climate change, defense, and the fact that people are living longer posed significant and current risks at a time when COVID, cost of living support, and higher interest rates were already straining public finances.
In May, the national debt reached a 60-year high of £2.56 trillion, equivalent to one year’s worth of national GDP.
According to the OBR’s fiscal risks and sustainability report, the government’s plans for stabilizing and subsequently reducing the debt as a proportion of national output were modest by historical and international standards.
Despite a March warning from the watchdog that the UK’s tax burden was on track to reach its highest level since the Second World War by 2027/28, the tax burden reached a record high in April.
The report highlighted several imminent financial burdens, including a projection that record long-term sickness in the workforce will cost the government an additional £6.8bn in benefit payments this year.
All of this makes for depressing reading at No. 11 Downing Street, where the chancellor seeks an occasion to give the public some gifts before the next election.
This possibility is becoming more remote by the day.
The OBR’s conclusions followed May’s 0.1% GDP decrease.
Inadvertently, and briefly, a stagnating economy helps the government and Bank of England lower consistently high inflation.
Before they can stop the tightening cycle that has resulted in 13 consecutive increases in Bank rates to date, Bank policymakers are looking for weaker demand as a consequence of rising interest rates.
Rising interest rates and market expectations for future interest rates are poor news for taxpayers and other borrowers, such as mortgage holders, because they have increased borrowing costs.
Earlier this month, yields, the implied interest rate, on core 10-year UK government bonds reached 2008 financial crisis levels.
Numerous UK IOUs are linked to inflation, thereby increasing the cost of debt servicing.
According to the OBR’s report, the 2020s are shaping up to be a very dangerous decade for public finances.
“Within just three years, they have been struck by the COVID pandemic in early 2020, the energy and cost-of-living crisis from mid-2021, and the abrupt interest rate hikes in 2022, the effects of which are still being felt.
This rapid succession of disruptions has resulted in the deepest recession in three centuries, the sharpest increase in energy prices since the 1970s, and the steepest sustained increase in borrowing costs since the 1990s.
“And they have pushed government borrowing to its highest level since the mid-1940s, the stock of government debt to its highest level since the early 1960s, and the cost of servicing that debt to its highest level since the late 1980s.”
