THE Office for Budget Responsibility turned on the Labour government months ago, despite years of partisanship against Conservative administrations (and particularly Brexiteers). So, no surprise that the OBR’s latest missive is critical.
What is surprising is the starkness of the OBR’s latest warnings.
On Tuesday the OBR released its latest ‘fiscal risks and sustainability’ report. The UK is in a ‘relatively vulnerable position,’ it faces ‘daunting’ risks to its public finances, its rising debt amounts to a ‘substantial erosion’ of its capacity to respond to future shocks.
UK government debt is 94 per cent of GDP — practically the same value as the entire economy. UK government debt is the fourth highest in Europe.
Do you remember — three decades ago, two decades ago, even one decade ago — when British governments warned against joining the Euro-zone, and signing up to ever closer union — given high public debt on the continent? Remember the Greek debt crisis in 2008? Well, Britain is now in uncomfortable company. With debt at the sixth highest among advanced economies, Britain ranks after Japan, Greece, Italy, France, and the US.
While the British government tilted its head disapprovingly towards continental finances, the British government did not correct its own addiction to spending more and disincentivizing entrepreneurship.
This is going to get worse. In some ways, debt begets debt. Once again, Britain is in uncomfortable company. Remember the Icelandic debt crisis from 2008 to 2010? The UK government pays the third-highest borrowing costs of any advanced economy, behind New Zealand and Iceland! Britain’s 10-year bond is yielding 4.5 per cent (as of the end of June).
And then there’s the rise in liabilities. The OBR warns that by the 2070s, an ageing population, healthcare costs, and other ‘age-related’ spending will push debt above 270 per cent of GDP!
The UK won’t be trading its way out of this mess. The UK’s deficit is nearly 6 per cent of GDP — around 4 percentage points higher than the average for advanced economies, and the third highest among European countries.
The OBR doesn’t entirely blame the current administration, it rightly blames a longer-term trend, over decades, governed by many prior administrations, formed from all three main political parties.
As the OBR states in its executive summary:
‘Efforts to put the UK’s public finances on a more sustainable footing have met with only limited and temporary success in recent years.Public sector net borrowing (PSNB) has oscillated around 5 per cent of GDP for the past four financial years. And while getting a measure of public debt falling as a share of GDP has featured in eight out of nine UK fiscal frameworks since 2010, underlying debt has risen by 24 per cent of GDP over the past 15 years and by 60 per cent of GDP over the past 20.’
The OBR doesn’t entirely blame Britain’s political administrations, it blames also international economic shocks. Donald Trump’s tariffs have been a convenient scapegoat for the administration. The OBR acknowledges the same excuse.
But still, the current administration is the worst administration since the 1970s to deal with Britain’s woeful economic trajectory. Labour administrations have always spent more than they have taken in, they have always increased public debt, they have always ended in economic collapse.
This particularly administration, led by Keir Starmer, promised to be more fiscally responsible than the Conservatives, to lower spending and to grow the economy. But the economy has grown below forecasts. Revenues have not grown as the government expected. Inflation is still higher than hoped. Spending has not fallen as much as planned.
The OBR focuses its first effective chapter (Chapter 2, counting the executive summary as 1) on the state pension, for costing three times more than initial expectations. In the 1950s, the state pension accounted for 2 per cent of GDP; since then it has climbed to 5 per cent. The OBR expects the cost to rise to nearly 8 per cent within 50 years. Meanwhile, revenues will be falling, due to an ageing population. The OBR implies that the state pension should be unlocked for cuts, but the current government has no plans. Likely the solution would be to raise the retirement age beyond 70 years for men and women. The retirement age has been raised before, against popular opposition. But that time, Labour blamed the heartless Conservatives.
Credit to the OBR for also warning of the real costs of net zero, which the government and the media like to avoid. Lost taxes on carbon would cost some £30 billion every year until the 2050s.
Net zero isn’t going anywhere — Ed Milliband has made that clear, and he remains one of the few strong personalities in Cabinet and with credibility with backbenchers (thanks to his forthright performances in the Commons).
Last week, the government failed to persuade its own backbenchers to support the government’s legislation to reduce spending on welfare and benefits. The Chancellor’s tears in the House of Commons on the morning after the night before spooked the financial markets (which feared an even less responsible Chancellor would be appointed).
The government now faces a similar backbench rebellion on plans to find efficiencies in special education, disabilities benefits, and (eventually) the National Health Service.
Meanwhile, just today, Dame Rachel de Souza, the children’s commissioner, said some children are living in ‘Dickensian’ levels of poverty, and called on the government to scrap the two-child benefit cap.
With virtuous demands for increased spending like these, how can this government lower spending? The adage about the road to hell being paved with good intentions is going unheard.
A rise in taxation is inevitable in the Autumn budget. This rise in taxation will inevitably suppress the economy and revenues. More millionaires will flee offshore. More companies were move their headquarters to other countries. The London stock market will continue to shrink.
Labour is reportedly considering wealth taxes, which would make some of the most valuable taxpayers flee, three business figures said yesterday. Hotelier Sir Rocco Forte, advertising legend Sir Martin Sorrell and former GSK chief Sir Philip Hampton said wealth taxes would be ‘very anti-growth.’
The rise in debt since 2010 is partly due to the scale of the two major shocks that the global economy has experienced over this period: the Covid pandemic and the energy crisis. The UK economy has been particularly hard hit by those shocks, and government support to affected firms and households has been relatively generous by international standards. But in the aftermath of the shocks, debt has also continued to rise and borrowing remained elevated because governments have reversed plans to consolidate the public finances. Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned. The more persistent fiscal deficits and ratcheting up of debt that resulted have been accommodated by successive loosening of the fiscal rules.
Britain’s economic trajectory, and political risk, will continue in the wrong direction at least until 2029, when the electorate gets another chance to vote for a new national administration.
