OBR: UK government debt on an unsustainable path, unless taxes are increased

The government’s independent forecaster warned that the UK’s debt is on an “unsustainable track” unless spending is cut and taxes raised.

According to the Office for Budget Responsibility (OBR), rising energy prices and pressures arising from an ageing population could tip the UK into recession.

According to the OBR, moving away from fossil fuel vehicles could have a negative impact on tax revenues.

It predicted that debt levels would more than triple in 50 years.

Inflation is increasing interest payments. They reached PS7.6bn in May, which was the highest monthly record for the month and an increase of PS3.1bn from last year.

The OBR’s fiscal risks and sustainability report stated that the government has already spent as much this financial year (1.25% GDP) to assist households with the cost of living crisis than it did supporting the economy during the 2008 financial crisis.

According to the OBR, bringing the debt back to 75% GDP (the level it stabilized in the government’s March 2020 Budget before the pandemic, would require taxes to rise or spending to fall or both.”

The OBR stated that public debt is on a nonsustainable path due to the pressures of ageing populations on spending and the loss motoring taxes in decarbonising economies.

The government has committed to banning the sale of new petrol- and diesel-powered vehicles by 2030. Fuel duties are a major source of tax revenue.

For the first time, the Office for Budget Responsibility combined its assessment on the sustainability of government finances with risks from trade tensions, wars and the net zero transition.

Overall, the picture is very grim for Downing Street’s new leader. It is clear that tax increases will be necessary.

As the economy becomes less productive, growth is expected to be lower. The OBR says that long-standing demographic problems, which will increase spending and old age dependence, have become more severe. This has led to government spending being concentrated in the NHS, social services, pensions payments, and other areas.

Nevertheless, some tax revenue sources, like fuel duty, are in danger of disappearing completely.

OBR models the possibility of the energy shock continuing today, major cyber attacks, and the need to significantly increase defence spending in order to manage new tensions around world. This would lead to a ballooning of government debts.

The portals to political power tend to be very short-term, but the OBR report, which is warning of many future risks and currently receiving little attention, is very important.

The total amount owed to the government by debt is the sum of all money that has accrued over time.

It was PS2.36 trillion in May 2022. This figure is almost as large as the UK’s economy. The UK’s debt reached 95.8% gross domestic product (GDP).

According to the OBR, the Ukraine war, high energy prices and long-term pressures on the country’s finances make it a difficult outlook for future governments and their ability to steer the public finances through future shocks.

It stated that “many threats remain”, including rising inflation, which could tip the economy into recession and continued uncertainty about our future trade relationship with the EU. There is also a risk of Covid cases resurging, a changing global environment, rising interest rates, and a shifting fiscal outlook.

Higher fuel, food, and energy prices are currently affecting household budgets. Inflation is 9.1%, and prices are increasing at the fastest pace in 40 years.

According to a BBC-commissioned study, it has caused many people to cut back on their spending, particularly on food and car travels.

It has also fueled fears that the UK might fall into recession. This is defined as the economy shrinking for two consecutive three month periods.

The OBR however stated that the current energy price woes might not be as severe as those of the 1970s.

It stated that while the 1970s oil crisis saw global energy prices rise in a similar manner as what we have seen after the pandemic and Russian invasion, there are good reasons to believe that this time the overall effect on inflation, output and unemployment will be less severe.”