Britain’s choice: spiralling debt, £40bn in spending cuts or tax rises every 10 years

Spending watchdog issues stark warning as UK struggles under £2.5 trillion debt pile

British families face an additional £40bn of tax rises or spending cuts every decade to avoid a “spiral” of public debt, the Government’s tax and spending watchdog has warned.
The Office for Budget Responsibility (OBR) said pressures from an ageing population, surging debt interest and the shift to net zero meant Britain’s £2.5 trillion debt pile would keep rising to 275pc of GDP without improvements in productivity or higher taxes.
Richard Hughes, the OBR chairman, warned that the public finances were on an “unsustainable path”, with a falling birth rate and more baby boomers moving into retirement “putting downward pressure on revenues and upward pressure on spending”.
Net zero, defence spending and the cost of dealing with rising temperatures and more severe weather would also push up debt in the coming years, he warned.
However, Mr Hughes rejected a suggestion by Darren Jones, the Chief Secretary to the Treasury, that the soaring debt trajectory was purely down to the “shocking state that our public finances were left in by the previous government”.
Mr Hughes said: “The projections reflect demographic trends over the next 50 years. And so the fiscal position of the government at any point in time makes less of a difference compared to those enormous pressures on the public finances that emerge over a 50-year period from things like an ageing society, from rising interest costs.
“Those are challenges that have faced successes in governments over extended periods.”
Highlighting America’s rising debt trajectory, Mr Hughes added: “They’re not challenges that are unique to the UK”, where debt is currently close to 100pc of GDP compared with 120pc in the US.
The OBR’s long-term outlook for the public finances comes amid a growing row over Labour’s claim that the Tories left a £22bn black hole in the public finances after the Treasury refused to provide more details of the deficit.
Jeremy Hunt, the shadow chancellor, branded the figure “bogus”.
He said: “This fictitious ‘black hole’ is purely of Labour’s own making – simply a political smokescreen for their public sector pay awards and forthcoming tax rises.”
Economists expect Rachel Reeves, the Chancellor, to raise taxes by an extra £20bn in next month’s Budget to pay for higher public spending.
The OBR’s long-run projections showed that getting debt back to pre-pandemic levels of around 85pc of GDP would require “an average fiscal tightening of 1.5pc of GDP per decade over the next 50 years” – equivalent to around £40bn of tax rises or spending cuts in today’s money.
On the current path, public spending over the next 50 years would rise from 45pc of GDP today – already its highest share since the 1970s – to more than 60pc.
The OBR warned: “As a result, debt would rise rapidly from the late 2030s to 274pc of GDP in our baseline projection.
“If these pressures were to materialise as we project, then governments would need to take mitigating policy action to prevent this upward debt spiral.”
It also highlighted the rapidly rising cost of state pension, with the triple lock that guarantees payments always rise by at least 2.5pc annually, costing the taxpayer an estimated £30bn a year extra in today’s terms by 2074.
The cost of the state pension is already estimated by the OBR to rise to £158bn by the end of this decade.
David Miles, a member of the OBR’s executive committee, warned that Britain’s debt was at risk of “blow[ing] up” as he warned that investors could lose faith in the UK’s ability to pay back its debts.
He said: “If governments continue to provide public services in line with rising demand [and] don’t pay for it in taxes, how much debt do they have to issue? The problem with that is, it’s almost certainly unsustainable.
“At some point, it will blow up. You can’t just expect the rest of the world to keep on buying more and more UK government debt, which rises at an ever accelerating rate.”
Trying to get debt down through tax rises alone could “damage people’s incentives to work and to save on such a scale that it actually undermines the production of the GDP, which those tax revenues depend on”, Mr Miles warned.
“One would, I think, be wary of thinking that you can increase the tax take year after year, without it doing some serious damage to the productive potential of the economy and the growth in productivity, which is the more painless way of closing the gap.”
Responding to the report, Mr Jones said the Government was beginning work “immediately to address the inheritance with tough choices on spending alongside ambitious action to drive growth”.
“By fixing the foundations, we will rebuild Britain and make every part of the country better off,” he said.
The OBR’s fiscal risks report runs to more than 120 pages and paints a bleak picture of the outlook for public finances over the next half a century.
A succession of forces are set to drive public spending higher, putting the national debt on an “unsustainable” path.
Here are the main problems facing public finances:
Britain is getting older at a startling rate. Women are having fewer babies on average and people are living longer, a combination that is pushing up the typical age of a Briton.
As welcome as longer lifespans are, they have alarming consequences for the public finances. An older population means more spending on healthcare and more years receiving the state pension, with a smaller share of people in work and paying the taxes needed to cover those bills.
Health spending is currently equivalent to almost 8pc of GDP. By the 2070s, it is set to rise to 14.5pc, according to the OBR.
At the same time, the state pension and other old-age benefits will rise from 5.6pc of GDP to 8.9pc.
There are three people of working age for every one aged over 65. That is set to fall over the coming years, with just over two people aged between 16 and 64 for every one over-65 by the 2070s.
Anticipated increases in the state pension age to 69 should alleviate some of the pressures on the public purse.
It is not just the number of pensioners that matters: it is also the size of the pension they draw.
The triple lock – which guarantees to increase the pension by the highest of inflation, average earnings or 2.5pc each year – will be an increasingly expensive policy promise if it stays in place over the decades to come.
Spending on the state pension is expected to rise from 5.2pc of GDP to 7.9pc by the 2070s. Just under half of this increase is down to the triple lock, according to the OBR.
As a result, the state pension will cost the taxpayer an additional £30bn a year by the 2070s.
The state pension is expected to rise by 4pc in April, based on the latest pay estimates, which show workers’ earnings rising faster than either inflation or 2.5pc.
“Alongside health, pensions create the biggest additional pressure on the public finances over the long run,” says Tom Josephs, an official at the OBR.
“That is certainly driven by both demographic pressures but also by the impacts of the triple lock, which is a considerable factor in terms of increasing the cost of the state pension over this period.”
Health spending is on track to take up close to one sixth of the economy in the 2070s, in part because the population is ageing.
On average those aged under-45 cost the Government less than £2,000 per year in health spending. Those aged over 85 cost an average of more than £13,000.
While people are living longer, not all of that extra life is spent in good health and that adds to the burden on the Exchequer.
The OBR says: “After increasing steadily through much of the 19th and 20th centuries, improvements in life expectancy have slowed since 2010, while healthy life expectancy has actually fallen by a year over the past decade.”
On top of this, the NHS is struggling with dire productivity, the growing cost of advanced medical technologies and the cost of treatments and ill-health associated with ageing, including diabetes and poor mental health.
As debt mounts, so do interest payments. That has to be paid for by more borrowing, in a terrifying spiral. The OBR calls this a “snowball effect”.
As the ageing population and debt interest combine, “debt as a share of GDP starts to rise exponentially”.
The annual cost of paying debt interest is poised to balloon from 4.1pc of GDP to 12.5pc – meaning the equivalent of £12.50 in every £100 of economic output goes towards debt payments.
“If these projections began to materialise it is almost certain that governments would need to take corrective action to prevent the public finances falling into what would likely be an unsustainable debt spiral,” the watchdog says.
Britain’s net zero drive will see revenues from fuel duty completely disappear in three decades.The OBR expects “net-zero-affected taxes” to fall from 1.2pc of GDP this decade to 0.3pc in the 2070s.
Assuming the ban on sales of petrol and diesel cars comes into effect in 2035, fuel duty revenues, which are expected to be £25bn this year, are expected to decline from 0.9pc of GDP in 2028-29 to zero from 2057-58. 
The OBR warned that “the transition to net zero could raise the stock of government debt by 21pc of GDP by 2050, with the largest single cost being that of lost fuel duty revenue.”
Even if net zero spending and efforts are curtailed, Britain will have to deal with the cost of increasingly extreme weather and an erratic climate. This will be a significant cost, the OBR warns.
The OBR estimated that the physical damage from climate change in the UK could “lower GDP by around 3pc by 2074 under a scenario where the world reaches net zero by 2070” because of more extreme weather such as flooding.
It warned of the cost of inaction in the UK: “We found that if policy action was delayed until the 2030s, the total costs could more than double in debt terms to 43pc of GDP by 2050.”
By contrast, speeding up net zero could boost the economy by the middle of the century.
The OBR said: “At the other extreme, if policy action including a carbon tax was taken earlier, government absorbed its share of whole-economy transition costs within its existing investment plans, and fuel duty was replaced with an equivalent tax on motoring, then getting to net zero could deliver a net fiscal benefit and lower the debt-to-GDP ratio by 12 percentage points by 2050.”
The range of scenarios point to the uncertainty inherent in forecasting public finances over a 50 year time horizon.
However, worryingly, almost all of the scenarios envisaged by the OBR point to rapidly spiralling public debt – unless painful corrective action is taken soon.