The UK’s national debt could hit 300% of GDP by the 2070s because of the string of major challenges still facing national governments after a “rapid succession of shocks”, according to a report for the Treasury.
The independent Office for Budget Responsibility laid out how climate change, defence and the fact people are living longer all posed significant, and current, risks at a time when the public finances are already reeling from COVID, cost of living support and higher interest rates.
The national debt hit a 60-year high of £2.56trn in May – equivalent to 100% of national GDP for a year.
The OBR’s fiscal risks and sustainability report stated that the government’s plans for stabilising and then reducing debt as a share of GDP were relatively modest by historical and international standards.
That was despite a previous warning from the watchdog, in March, that the UK’s tax burden was on course to hit the highest level since the Second World War by 2027/8.
The report highlighted a number of immediate financial burdens, including a projection that the hit from record long-term sickness in the workforce will cost the state a further £6.8bn this year in benefit payments.
It all makes for grim reading in Number 11 Downing St as the chancellor seeks an opportunity to deliver some goodies to the public ahead of the next election.
That prospect is looking more elusive by the day.
Please use Chrome browser for a more accessible video player
The OBR’s findings were delivered just hours after the latest grim set of stats covering the economy, with official figures for May showing a contraction for gross domestic product (GDP) of 0.1%.
Perversely, a flatlining economy is actually and temporarily good news for the government and Bank of England as both seek to bring down stubbornly high inflation.
Weaker demand in reaction to rising interest rates is what Bank policymakers are looking for before they can halt the tightening cycle that has resulted in 13 consecutive increases in Bank rate to date.
Rising interest rates, and market expectations for rates, are bad news for the taxpayer as well as wider borrowers, such as mortgage holders, because they have forced up borrowing costs.
Please use Chrome browser for a more accessible video player
Yields, the implied interest rate, on core 10-year UK government bonds hit 2008 financial crisis levels earlier this month.
Many UK IOUs are linked to inflation, making the cost of servicing the existing debt pile worse.
The OBR’s report said: “The 2020s are turning out to be a very risky era for the public finances.
“In just three years, they have been hit by the COVID pandemic in early 2020, the energy and cost-of-living crisis from mid-2021, and the sudden interest rate rises in 2022, whose consequences continue to unfold.
“This rapid succession of shocks has delivered the deepest recession in three centuries, the sharpest rise in energy prices since the 1970s, and the steepest sustained rise 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 since the late 1980s.”
