UK debt ‘could soar to 300% of GDP’

Public debt levels in the UK could soar to up to 300 per cent of GDP over the next 50 years as governments wrestle with challenges such as climate change and an ageing population, the Office for Budget Responsibility has warned.
As part of its assessment of the long-term fiscal risks facing the economy, the independent watchdog said that policy choices and future spending pressures “put the public finances on an unsustainable path”.
The OBR said: “Over the next 50 years, public spending is projected to rise from 45 [per cent] to over 60 per cent of GDP, while revenues remain at around 40 per cent. As a result, debt would rise rapidly from the late 2030s to 274 per cent of GDP in our baseline projection.”
The report comes ahead of the government’s first budget next month, in which Sir Keir Starmer has warned of “tough choices” on tax and spending. Publication of the OBR’s assessment was delayed from July to avoid coinciding with the general election.
The UK’s debt is just below 100 per cent of GDP and has nearly tripled since the 2007-09 financial crisis, with governments forced to bail out the banking system and fund emergencies during the pandemic.
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The OBR’s modelling factored in long-term policy challenges, such as the UK’s commitment to hit net zero climate emissions by 2050, and modelled the rate at which the population is due to age, with postwar “baby boomers” entering retirement, putting pressure on pensions spending and reducing tax revenues.
In most of its scenarios for the public finances “there is a similar upward debt trajectory in nearly all”, the OBR said, including hitting 300 per cent of GDP in a situation with additional geopolitical shocks. Its central forecast saw debt hit 274 per cent of GDP, the highest outside the Napoleonic wars and the Second World War.
The watchdog said future governments would have to take action in the form of raising taxes, cutting spending, and hoping for a significant improvement in the UK’s stagnant productivity growth to alleviate pressures on the public finances in decades to come.
David Miles, who sits on the OBR’s budget responsibility committee, said the projected rate of borrowing was “unsustainable and at some point it will blow up”.
“You can’t just expect the rest of the world to keep buying up UK debt that rises at an ever accelerating rate. So the problem with our central projection is that it’s almost certain to be unfeasible and at some point it would blow up as people would not be willing to buy up the debt.”
The biggest single revenue source set to diminish in the coming decades is fuel duty, as the sale of new internal combustion engine vehicles is banned after 2035 as part of the UK’s climate change efforts. The OBR said that fuel taxes were due to drop from 1 per cent of GDP to 0.1 per cent, with the widespread adoption of electric cars. This would make up the biggest fiscal cost of the net zero transition, adding 20 percentage points to the debt pile, even if the UK introduces a “comprehensive carbon tax” to replace lost fuel revenues.
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However, if future governments adopt carbon taxes, do not resort to borrowing to fund the transition and replace fuel duty with an equivalent motoring levy, the green transition could help to lower the debt pile by 12 percentage points.
The forecasts show that overall income taxes are likely to remain stable over the next 50 years at around 11 per cent of GDP as retiring workers are replaced by migrants. National insurance contributions are likely to fall slightly from 6 per cent to 5.8 per cent of GDP in the 2070s, with corporation tax and VAT staying broadly stable as a share of the economy.