The Office for Budget Responsibility has dashed the hopes of potential tax-cutting Conservative leadership candidates, saying the UK’s public finances are already “on an unsustainable path in the long term”.
In a long-planned report, the government’s independent fiscal watchdog said Thursday that geopolitical tensions and the energy crisis highlight emerging risks to public finances on top of existing pressures from an aging population.
The watchdog’s message will be of concern to many of the contenders to become the next prime minister and leader of the Conservatives, who have called for lower taxes to boost the UK’s economic growth rate.
The OBR praised the tax hikes overseen by former chancellor Rishi Sunak as enabling the UK’s fiscal position for the next 20 years to be unaffected by the Covid-19 pandemic.
He also noted that demographic pressures are more favorable than previously thought for public finances. But the report on fiscal risks and sustainability contained a warning to MPs calling for permanently lower taxes.
The OBR said existing demographic pressures and new fiscal risks “create a challenging outlook for this and future governments as they navigate public finances through inevitable future shocks while managing multiple slowly growing pressures”.
In its projections, the watchdog showed public debt steadily rising above 100 percent of gross domestic product by mid-century and rising further thereafter to reach twice the level of GDP by the mid-1960s.
The OBR said around £37 billion of extra tax increases or public spending cuts each decade were needed to stabilize public finances in the long term.
“Returning the debt to 75 percent of GDP – the level at which it was stabilized in the government’s March 2020 pre-pandemic budget – would require taxes to rise, spending to fall or a combination of both, amounting to 1.5 percent of the Additional tightening of GDP at the start of every decade for the next 50 years,” it said.
If geopolitical pressures increase, those tax increases will need to be larger, the watchdog added, and if energy prices rise further or remain at their current high levels.
In a more perilous global political environment, the OBR said government action to help vulnerable households with living costs would further erode public finances.
“Additional fiscal support to households of the kind seen this year would cushion the short-term hit to household incomes, but only at the cost of shifting a greater burden of public debt onto future households,” he warns.
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