UK faces unsustainable debt burden unless taxes rise, watchdog warns

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Drone view of the financial district in London, Britain July 3, 2022. REUTERS/Yann Tessier

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  • OBR says UK debt could reach 320% of GDP by 2070
  • Population aging and decarbonization drive up costs
  • Risk of long-term increase in defense and energy bills
  • The government must close the budgetary hole caused by the loss of the fuel tax
  • Britain’s new finance minister under pressure to cut taxes

LONDON, July 7 (Reuters) – Britain faces an unsustainable debt burden more than three times its current level unless future governments raise taxes to fund rising costs. an aging population and falling revenue from fuel taxes, a watchdog warned on Thursday.

The UK Office for Budget Responsibility (OBR), a government agency, said debt was on track to reach more than 320% of gross domestic product (GDP) in 50 years, up from 96% or 2.4 trillion pounds ($2.9 trillion) currently. – if successive governments do not tighten fiscal policy.

“The spending pressures of an aging population and the loss of existing car taxes in a decarbonizing economy leave public debt on an unsustainable long-term path,” the OBR said.

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The UK government has pledged to ban the sale of new petrol and diesel cars from 2030. Fuel taxes are currently an important source of tax revenue, while household electricity is fairly lightly taxed.

The Watchdog’s report comes just before Prime Minister Boris Johnson announces his resignation, sparking a Conservative Party leadership race in which candidates will be under pressure to promise tax cuts.

“Tax cuts can of course be financed by spending cuts. But if they are financed by more borrowing, then yes, that puts more pressure and arguably comes with additional risks in an economy that is experiencing high inflation,” said OBR board member Andy King. told reporters.

OBR chairman Richard Hughes said his main message to Britain’s new finance minister, Nadhim Zahawi, was to prepare for unpredictable fiscal shocks such as the recent and hugely costly COVID-19 pandemic.

The OBR’s baseline forecast shows that debt as a percentage of GDP will decline over the next 20 years – partly due to the short-term gains of a lower birth rate and a slower increase in l life expectancy – before reaching 267% of GDP in 50 years.

Getting back to the pre-COVID debt ratio of 75% of GDP would require additional tax increases or spending cuts of 1.5% of GDP or £37bn every decade for the next 50 years, a said the OBR.

If the type of economic shocks that have hit the UK economy since World War II are added, the debt burden would exceed 320% of GDP without corrective measures.

The deteriorating global geopolitical situation – exemplified by Russia’s invasion of Ukraine – could push debt even higher, the OBR said.

Debt could rise to 430% of GDP in 50 years if Britain increases defense spending to 3% of GDP from 2%, takes a one-time big hit from a cyber attack and suffers lingering damage from a global trade war.

($1 = 0.8347 pounds)

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Reporting by David Milliken, editing by Andy Bruce and Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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