The Office for Budget Responsibility (OBR) has warned that UK public debt is on an unsustainable trajectory, projecting that without government intervention, debt would enter an ever-upward path from around the 2040s. The independent forecaster highlighted pressures from an aging population and rising defence spending as key drivers.
Defence Spending Gap
The OBR stated that to meet the government's commitment to spend 3.5% of GDP on defence, annual spending would need to increase by an additional £28 billion, even after accounting for new funding announced in last week's investment plan. This underscores the fiscal challenges facing the incoming prime minister, Andy Burnham.
Thames Water Creditors Push Forward
Thames Water's creditors, a group of 100 institutional investors holding approximately £14 billion of the company's senior debt, are continuing to pursue a £10 billion rescue proposal despite potential temporary nationalisation under a new government. They have held recent meetings with Ofwat officials. Environment Secretary Emma Reynolds objected to the proposal in mid-June, arguing it would place an "undue burden" on consumers, pushing the utility closer to a special administration regime (SAR).
Bank of England Eases Capital Requirements
The Bank of England announced plans to loosen capital requirements for major UK lenders, including scrapping a longstanding buffer within the leverage ratio. This move would primarily benefit large domestic banks such as NatWest, Lloyds, Nationwide, and Santander UK. The Bank's Financial Policy Committee (FPC) acknowledged concerns about financial stability risks from rapid AI developments and debt-fuelled stock investments but proceeded with the easing, which aims to reduce the financial cushion banks must hold to absorb losses.
