(Bloomberg) -- The UK’s official forecaster warned that public debt will nearly triple to over 270% of GDP in 50 years unless the government can solve the country’s health crisis and revive productivity growth.
The Office for Budget Responsibility said rising health spending is expected to be the biggest driver, almost doubling to 14.5% of GDP in its long-term projection published Thursday. That is being caused by an aging population.
The fiscal watchdog laid out a dire projection for the UK public finances in its annual fiscal risks report as a raft of pressures combine to send debt soaring. It said “these projections show debt on an unsustainable path over the next 50 years.”
However, the OBR also said the pressures could be partially reversed if the government improves the health of the population and boosts the driver of economic growth, productivity. Returning output per hour growth to its pre-financial crisis levels would keep debt below 100% of GDP.
The projections assume that the government takes no action to prevent the debt spiral. The OBR said that a fiscal tightening of just 1.5% of GDP per decade over the next 50 years would return debt to pre-pandemic levels — equivalent to roughly £40 billion.
The warning comes as Chancellor Rachel Reeves tries to find money to fill a £22 billion ($28.7 billion) fiscal hole she claims was left by the previous Conservative government. Reeves will need to find even more money in her first budget on Oct. 30 if the OBR takes a more pessimistic view of the economy than forecast in March.
The report revealed the importance of the Labour government’s aim to get the economy motoring again after years of anemic growth. Prime Minister Keir Starmer has pledged to boost annual GDP growth to 2.5%, levels not seen on a sustainable basis since before the financial crisis.
Britain is already in a vulnerable position after debt climbed to almost 100%, the highest level since the early 1960s. The burden has been pushed up by government spending soaring during the pandemic and the energy crisis following Russia’s invasion of Ukraine.
“The past two decades have seen the UK economy hit by a succession of extraordinary shocks, in the form of a global financial crisis, a pandemic, and an energy crisis,” the OBR said in the report. “The public finances have emerged from these shocks under strain.”
Higher spending on healthcare, state pensions, the climate transition and interest costs combined with dwindling revenue from fuel duty will drive borrowing higher, the OBR said. Annual government spending is on track to surge by 2074 while receipts flatline, leaving a budget deficit of over 20% of GDP.
In the early decades of the 50 year forecast, the ageing population drives up both healthcare costs and the state pension, which is protected by the triple lock that guarantees the benefit rises by the higher of inflation, average wages or 2.5%. As those spiral, the debt level explodes, causing a “snowball effect” on debt interest.
The result is a 19 percentage-point increase in the budget deficit between 2028-29 and 2073-74, the OBR said. Higher debt-interest costs account for 8.5 percentage points of that rise. Health and pensioner spending add another 9.9 points. Tax receipts fall as tobacco and fuel duty are affected by social trends and electric vehicles.
Improving the health of the population could cut lower the projected debt burden by 40% of GDP, the OBR said just hours after a damning report into the failings of the National Health Service. Its estimate for health spending was lower than previously predicted due to higher net migration and projections for slower increases in life expectancy.
While Reeves has rolled the pitch for a belt-tightening budget where spending is squeezed and taxes rise, she also faces a backlash from Labour MPs over the cuts. More than 50 Labour MPs abstained in a vote this week on the Chancellor’s plan to cut winter fuel subsidies for all but the poorest pensioners.
Government borrowing is already overshooting the OBR’s forecast for the current fiscal year due to higher-than-expected spending.
The Labour government seized on the projections to lay the blame at the previous Conservative administration. Chief Secretary to the Treasury Darren Jones said the public finances were in a “shocking state” and that “tough choices on spending alongside ambitious action to drive growth” are needed.
©2024 Bloomberg L.P.
