The Treasurys budget watchdog today warned that the governments spending plans, including a planned £20.5bn boost to National Health Service (NHS) spending, are unsustainable without tax rises or further spending cuts.
The Office for Budget Responsibility (OBR) said that the public finances are “likely to come under significant pressure over the longer term” as an ageing population requires higher health spending.
The outlook for the public finances has become “less favourable” since the OBRs last similar analysis, in January 2017, in part because of Prime Minister Theresa Mays June announcement of extra NHS spending of £20.5bn a year by 2023-24.
Without extra tax rises or spending cuts government debt would be put on “an unsustainable upward trajectory”, the OBR said.
It also discredited Mays assertion that the extra NHS spending would be funded by a “Brexit dividend”, saying that leaving the EU is more likely to increase fiscal pressures.
Projections from the OBRs fiscal sustainability report show that on its current path, the governments deficit would rise from 0.3 per cent of GDP in the 2022-23 fiscal year to hit 8.6 per cent of GDP in 2067-68 – a £176.5bn deficit in todays terms.
In this scenario the governments debt load to above 280 per cent of GDP in 50 years time, far above the post-Second World War peak of 87 per cent hit last autumn. The size of the debt increased rapidly in the aftermath of the 2008 financial crisis, as government borrowed to sustain spending while the economy crashed.
While the OBR figures are hypothetical – a government would be unlikely to pass spending commitments which would increase the debt so dramatically – they will provide a boost to fiscal hawks in the Treasury who want to continue low-spending austerity policies.
Chancellor Philip Hammond said: “We must continue to deliver on our commitment to fix our public finances, and we must reject the arguments of those who think that debt can rise again without consequences.”
Weak growth prospects for the UK forced the OBR – an independently run body which provides the governments official forecasts – to downgrade the prospects for UK GDP growth last November. Weaker economic growth has repeatedly delayed the governments target to reduce the national debt as a proportion to GDP or to run a budget surplus.
Economists are bitterly divided as to what level of debt would prompt a lending crunch, after an extended period in which borrowing costs for the UK government have remained very low. Nevertheless, rising debt over the long term would almost certainly prompt a face-off between financial markets and the government.
To return government debt levels to 40 per cent of GDP in 50 years time (the same level sen in July 2008) the government would have to tighten the fiscal taps – with spending cuts or tax rises – by £111bn in todays terms.