By: Mike Denham, chairman of the TaxPayers' Alliance
The Office for Budget Responsibility (OBR) is not given to hysterical exaggeration, so when they describe the outlook for government finances as “alarming” we should all be worried. And taxpayers should be especially worried.
At over 100 percent of GDP, government debt is already at its highest level for 60 years, a reality confirmed by fresh ONS figures confirming that UK debt now stands at a shocking £2.6 trillion. But according to the OBR’s latest long-term fiscal projections, on current policies it’s set to triple over the next few decades. According to their projections, debt piles up far beyond anything previously recorded – even in wartime – reaching levels which would almost certainly trigger an economic catastrophe.
Here’s their summary chart, with their main baseline forecast in green (labelled FRS 2023 Baseline).
Debt at 300 percent of GDP would be catastrophic enough, but the OBR goes on to note:
“While alarming in itself, this baseline projection likely understates the full range of potential long-term pressures on the public finances”.
They identify three such additional pressures – their risk scenarios:
- As government debt spirals, the markets are likely to demand ever higher interest rates on that debt. Past experience suggests that for every 10 percentage point increase in the debt-to-GDP ratio, rates increase by 0.2 – 0.3% pa. Such an increase would push the debt ratio up towards 400 percent.
- Although the current government has assumed a tough spending “envelope” from the mid-2020s onwards, delivery is highly uncertain. When it comes to the nitty gritty of setting Department Expenditure Limits (DELs), successive governments have proved incapable of actually delivering on their tough promises. Similar failure this time would also push the debt ratio up towards 400 per cent.
- In recent years there have been more frequent shocks to the public finances, including the 2008 Financial Crash, Covid, and the war in Ukraine. Each has added around 20 percent to the debt ratio, and if they continue at a similar rate over coming decades, the debt ratio would increase to over 400 per cent.
And as the OBR points out, these risks are not mutually exclusive. An entirely possible combination of all three would take the debt ratio to over 500 per cent of GDP – more than twice the previous record level at the end of the Second World War.
Of course, in reality, the debt ratio would never get to any of these projected levels because the markets would long since have cut off funding, or at least cranked up borrowing costs to such a level that the government would be forced to get a grip. As the OBR puts it in its measured Sir Humphrey way, “one would assume that policymakers would take action long before debt would be allowed to reach that level”.
The real issue then is, faced with this outlook, what action will policymakers decide to take? And for taxpayers, the real alarm is that our current crop of politicians find it a whole lot easier to increase taxes than to tackle their insatiable appetite for more public spending.
Since the turn of the Millennium, public spending has ratcheted up by an astonishing 11 per cent of GDP (Total Managed Expenditure – TME). And on the OBR’s projections it’s set to go on increasing, from its current 46 percent of GDP up to 64 per cent in the baseline case. They haven’t published separate spending numbers to accompany their three risk scenarios, but judging from their debt projections, our guess is that projected spending is getting close to 100 per cent of GDP.
In other words, if the OBR’s projections are right, on current policies, public spending is set to increase inexorably until absorbing the entirety of our economic output.
To head off this disastrous prospect the TPA has long campaigned for substantial spending cuts and public sector savings, and we have made many specific suggestions to achieve that.
Unfortunately not everyone sees it that way. Much of the Westminster and mainstream economic establishment argues that governments need to spend these increasing amounts because these days people expect the state to do more. They expect the state not only to provide cradle to grave healthcare, education, and welfare support, but also to shield us from upheavals in the world around us, such as higher energy and borrowing costs. They accept that it’s expensive and it can’t all be funded from extra borrowing, which means that taxes must increase to fill the gap.
As the Institute for Fiscal Studies puts it, we must “recognise the fiscal writing on the wall. The scale of the challenge means we’re all probably going to have to pay a bit more, not just companies or the very richest. The sooner we’re open about that reality, the better”.
But there is of course a serious difficulty with that approach. Which is that higher taxes will further depress our already dismal economic growth performance, making it even harder to fund the projected growth in public spending. It’s reinforcing a particularly vicious circle.
We only have one sure way of getting government finances, taxation, and the wider economy back on to a sustainable track, and that is to get a firm grip on public spending. Fashionable or not, the TPA will continue to campaign for precisely that.