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Faltering efforts to bring down UK government debt in recent years have led to a “substantial erosion” of the country’s capacity to tackle future shocks and strains on public spending, the independent fiscal forecaster has warned.
Efforts to put the UK’s public finances on a more sustainable footing have met with only “limited and temporary” success in recent years, the Office for Budget Responsibility said in its fiscal risks and sustainability report on Tuesday.
While underlying public debt is at its highest level since the early 1960s and set to rise further, turning the situation around has become “considerably more challenging” given low economic growth and rising interest rates.
“Against this more challenging domestic and global backdrop, the scale and array of risks to the UK fiscal outlook remains daunting,” the OBR said. “The result has been a substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances.”
The report comes as chancellor Rachel Reeves faces renewed pressure to raise taxes in the autumn Budget given signs of a further deterioration in the health of the public finances.
U-turns on welfare reforms coupled with strains on the UK economy and the threat of productivity downgrades from the OBR could force a fiscal consolidation exceeding £20bn in the autumn, economists say.
In its report, the OBR noted that the UK now has the sixth-highest debt, fifth-highest deficit, and third-highest borrowing costs among 36 advanced economies.
Against this vulnerable backdrop, the risks to the fiscal outlook are mounting, it said. The report highlighted additional pressures from the sustainability of state and private pensions as well as the costs of climate damage and the net zero transition.
Rising public borrowing in the UK and other advanced economies is creating wider pressures in global sovereign debt markets, the OBR added, pointing out that long-term gilt yields are now higher in the UK than at any point since the start of the century.
Responding to the report, the Treasury said: “We recognise the long-standing economic realities the OBR sets out in its report.
“This is why we are committed to ensuring stability in the economy through our non-negotiable fiscal rules, which have allowed us to invest in the UK to drive a decade of renewal and put more money in people’s pockets.”
