Britain Public debt on course to hit 300% of GDP, says watchdog
The Office for Budget Responsibility, the government’s fiscal watchdog, has produced its annual assessment of the long-term state of the public finances for the next half a century.
As in previous years, the report warns of structural issues facing the UK economy that could consign it to a future of permanently high debt levels and rising pressures on public spending.
This includes an ageing society, weak productivity growth, and increasing demands on the state to meet goals such as defence spending and the green transition.
These are some of its findings.
BALLOONING DEBT LEVELS
In almost all the scenarios modelled by the OBR’s economists, public debt is on an “unsustainable path”. The UK’s average debt pile has tripled since the start of this century and is at its highest outside wartime at 95 per cent of GDP. Assuming no change to government policy and no additional shocks to the public finances, this will rise to 300 per cent of GDP by 2075, according to the OBR’s simulations.
Rapidly growing debt burdens are not just a problem for the UK. Three of the world’s biggest economies, the United States, China and Germany, will have budget deficits in the 2030s that exceed the peaks reached during the 2008-09 financial crisis, according to estimates from Deutsche Bank.
The UK’s fiscal arithmetic is defined by two challenges: the pressure on government spending for health, social care, pensions and defence is growing, while the country’s tax take is on course to be stable over the next 50 years. The OBR says tax receipts will be broadly unchanged at 41 per cent of GDP into the 2070s, but public spending is on course to grow from 40 per cent of GDP today to close to 50 per cent over this period.
AUSTERITY NOW?
The OBR’s warnings over a ballooning debt pile apply to the period after 2030. In the short run, Labour’s announced fiscal policy measures are on course to stabilise borrowing and spending. The watchdog says the UK’s primary deficit, which measures the budget deficit before debt interest payments, will flip from a 1.4 per cent deficit to a surplus of 1.5 per cent by the end of the decade.
This will be the biggest budget buffer any government has recorded since 2000 and will stabilise the debt pile over the next five years.
There is, however, a danger that Labour’s plans to reduce borrowing and spending will not materialise. They were made under Rachel Reeves, who is likely to lose her job should Andy Burnham become prime minister this month. Burnham has said he will stick to Reeves’s fiscal rules and Labour’s manifesto promises on tax until a new election. But the OBR warns that most governments, even without changes of leadership, struggle to stick to plans to consolidate the public finances in the latter half of a parliamentary term.
AN AI MIRACLE OR JOBS WIPEOUT?
The watchdog has not made any definitive estimates about the impact of artificial intelligence on the economy but instead looked at two features of the technology: the potential for a rise in labour productivity, and the scale of jobs substitution.
On productivity, which is the key measure of rising future living standards and healthier public finances, the OBR uses an estimate of 1.4 per cent annual productivity increases over the next five decades. This is substantially higher than the productivity record since the financial crisis, which has dropped from 1.7 per cent to below 0.5 per cent in recent years. This dismal performance explains why a host of governments have struggled to prevent the long-term debt burden from falling after the financial crisis.
David Miles, a member of the OBR’s budget responsibility committee, said the estimate incorporates some of the productivity benefits of AI. Independent estimates of the AI boost to productivity range from as low as 0.1 per cent to as much as 0.8 per cent but the OBR has not taken a view either way as deployment is still at the early stages.
Higher productivity growth should, in theory benefit the public finances but AI risks accelerating the shift from worker power to the power of capital. If AI makes some jobs redundant, this can reduce income taxes accruing to the Treasury. The watchdog estimates that 10 per cent of the labour force is “exposed” to job substitution from AI over the next decade. By contrast, if AI enhances worker productivity, this could lead to rising earnings growth and benefit the Exchequer. The OBR thinks just under a third of all UK jobs could be complemented by the technology.
RAISING THE TAX BURDEN
The watchdog has warned future prime ministers that raising taxes cannot be the only way to repair the country’s public finances. The OBR’s estimates show the UK still has a lower average tax burden than peers in Europe and the G7 but there are economic costs to raising the tax burden on workers by reducing incentives to work.
Miles said the UK’s average tax rates have grown closer to European levels in the last two decades. “This [trend] looks set to continue and is part of the process of stabilising the debt-to-GDP ratio.”
“Can you keep going? In economics theory, with all other things being equal, the higher the tax rate is in the economy, the damages and distortions that come with further rises, increase exponentially.
If you start with a tax-to-GDP take that goes from 20 per cent to 21 per cent — that would do marginal damage on average. Going from 40 per cent to 41 per cent, which is nearer to where we are now, would do twice as much damage.
“And going from 50 per cent to 51 per cent, would do yet more damage. It is not that the pain increases a little bit but increases exponentially. It’s optimistic to think there is an easy [tax] solution to this.”
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