Britain’s national debt is moving on to an “unsustainable and ever-rising path”, according to the Office for Budget Responsibility in its Fiscal Risks and Sustainability report, published on Tuesday.
As a share of annual national income, debt has tripled since 2005, from about one-third of national income (GDP) to just under 100 per cent. This is worse than the average among rich countries, which is about 50 per cent – although Japan is over 200 per cent, the United States is 120 per cent and France and Italy are both over 100 per cent.
The OBR attributes the rise partly to three external shocks: the financial crisis, the pandemic and the Ukraine war. But the purpose of this week’s report is to look ahead over the next 50 years – to the 2070s – to see what might happen to debt and how it might be controlled.
The main forecast in the report is that debt will rise to 300 per cent of national income by the mid-2070s. This is because, in the longer term, public spending is projected to increase as a share of national income, while tax revenues will merely keep pace with national income.
Spending on healthcare is expected to rise from 8 to 13 per cent of GDP, driven mainly by an ageing population but also by higher costs of new treatments and lower productivity in the NHS than in the wider economy.
The other big increase in spending is expected to be on state pensions, rising from 5 to 9 per cent over the same period. This is partly because there will be more pensioners, despite the rising of the state pension age, first to 68 and then to 69, and partly because the triple lock policy ensures that the pension will rise by more than the GDP.
The triple lock, signed up to by all the main parties, guarantees that the state pension will rise each year in line with prices, earnings or 2.5 per cent, whichever is higher.
The OBR is the arbitrator of the government’s fiscal rules, but they cover only the next three years. Debt as a share of GDP has to be falling in the third year of the forecast, but it is a rolling forecast, so the rule is met as long as the forecast debt for year three is lower than that for year two – debt never actually has to fall.
In fact, the forecast for debt as a share of GDP is pretty flat for the first two decades of the long-range projection. It is only after about 2045 that the scary scenarios really start to unfold. In the worst scenario, debt rises to more than 10 times the national income.
Although the serious problems seem a long way off, the long-term sustainability of the national debt affects us now because lenders demand higher interest rates if they think there are doubts about the government’s creditworthiness.
In the dry language of the OBR report, “This all underscores our conviction that unsustainable fiscal outcomes that may not occur for some years are today’s challenge, not tomorrow’s.”
That may not matter so much in America, because it is such a large economy, but British interest rates are already higher than the average. This means that the government has to pay more in debt interest – creating a potential feedback loop as more spending leads to more borrowing.
And it means that citizens have to pay more for their mortgages, as many thousands of people are discovering as they come off fixed-rate mortgage deals set during the period of ultra-low interest rates.
That is also, incidentally, why Andy Burnham’s choice of chancellor is so important. If he chooses someone in whom lenders have little confidence, interest rates will go up.
If debt is to remain stable as a share of national income over the long term, spending will have to be lower than forecast or taxes higher. The likely outcome is probably a combination of the two. The most obvious target on the spending side is the triple lock, which has served its purpose in raising the state pension to a decent level, but should be linked in future to a better measure such as GDP per head, which would not outpace the rise in GDP over time.
