Britain’s national debt could rise to as much as 300% of GDP over the next half century, driven by escalating costs associated with climate change and an aging population, the Office for Budget Responsibility (OBR) has warned.
In its latest report on long-term fiscal risks, the independent watchdog warns that current policy choices and future spending pressures are putting public finances on an unsustainable path.
The OBR predicts that government spending will increase from 45% to over 60% of GDP by 2073, while government revenues are expected to hover around 40% of GDP. Under the baseline scenario, the OBR predicts that public debt could reach 274% of GDP by the end of 2030, the highest non-wartime level, with potential peaks of 300% in scenarios with additional geopolitical shocks.
These grim projections anticipate the government’s upcoming budget, where tough decisions on taxes and spending will be necessary. The report underlines the long-term budget challenges facing future governments, especially as Britain delivers on its pledge to reach net-zero emissions by 2050 and faces a demographic shift towards an older population.
David Miles, member of the OBR’s Budget Responsibility Committee, stressed the urgency of tackling these budget pressures, warning that the current borrowing trajectory is “unsustainable” and risks destabilizing the economy. “You can’t just expect the rest of the world to keep buying up British debt, which is rising at an ever-increasing pace,” Miles said, underscoring the need for a major policy review.
The transition to a green economy is expected to have significant budgetary implications, especially as fuel excise revenues – a key revenue stream for the government – decline due to the rise of electric vehicles. The OBR estimates that fuel taxes, which currently contribute around 1% of GDP, will fall to just 0.1%, increasing public debt by 20 percentage points, even if a comprehensive carbon tax is introduced. However, if new car taxes are introduced to replace fuel taxes, the impact on debt levels could be softened by as much as 12 percentage points.
The report also highlights the crucial role of productivity growth in easing fiscal pressures. The OBR says that even a modest increase in productivity could significantly reduce the projected rise in debt, with a 0.1% improvement potentially reducing the debt-to-GDP ratio by 25 percentage points over the next few decades. However, recent productivity growth in Britain has been slow, averaging just 0.5% per year over the past fifteen years, compared to pre-2008 figures of over 2%.
In light of these challenges, the OBR warns that future governments will need to take decisive action, including raising taxes, cutting spending and pursuing policies to boost productivity growth. The report also highlights the potential impact of migration as a short-term fiscal stimulus, with higher-than-expected net migration expected to increase the UK population from 68 million to 82 million by 2074.
However, as the migrant population ages, initial fiscal benefits are expected to decline, posing additional challenges to the UK’s long-term fiscal prospects. As the government prepares to deliver its first budget, the OBR’s findings highlight the difficult balancing act required to ensure sustainable public finances while supporting economic growth and meeting the demands of an aging society.