The Office for Budget Responsibility (OBR) has warned that policymakers must act to prevent public debt from rising unsustainably in the coming decades, driven by an ageing population and increased defence spending. In its latest fiscal risks and sustainability report, the independent forecaster stated that without government intervention, debt would move onto an unsustainable, ever-upward path from around the 2040s.
Defence Spending Requires Additional £28bn a Year
The OBR said defence spending would need to increase by an extra £28bn a year to meet the government's pledge to spend 3.5% of GDP, despite the announcement of more funding in last week's investment plan. The report assumes that this pledge will be met, highlighting the significant fiscal pressure from defence commitments.
State Pension and Health Costs Add Pressure
State pension spending could rise from 5% of GDP to 9% over the next 50 years if current policies remain unchanged, according to the OBR. A third of this increase is attributed to the triple lock, which raises pensions by the highest of earnings, inflation, or 2.5%. Switching to average earnings indexing would save 2% of GDP by the end of the period.
Health spending is projected to increase from 8% of GDP to 13% by 2075 as the proportion of older people grows. The OBR noted that spending growth could be constrained if productivity in the health sector improves.
Debt-to-GDP Ratio Expected to Rise Again After 2030s
While Chancellor Rachel Reeves's fiscal plans are expected to stabilise the debt-to-GDP ratio at about 95% by 2030-31, the OBR's baseline projection shows it accelerating again from the mid-2030s. Tom Josephs of the OBR said this could happen earlier if the government fails to stick to ambitious deficit reduction plans or if the economy faces another major shock.
Call for Early Action to Avoid Larger Adjustment
Josephs emphasised that earlier action to repair the public finances would require a less dramatic adjustment. He stated, "The significant uncertainty around these projections should not be used as an excuse for inaction. Unsustainable fiscal outcomes that may not occur for some years are today's challenge, not just tomorrow's." He added that the required shift would be twice as large if implemented in the mid-century rather than the early 2030s, concluding, "Doing this earlier would be less costly than delaying the required fiscal adjustment."
The OBR has been without a permanent director since Richard Hughes resigned in December over the inadvertent early release of budget details. Reeves's nominee, economist Jonathan Haskel, is yet to be confirmed in post.
