The UK's public finances face significant long-term risks, with potential for soaring debt and a substantial increase in the number of higher-rate taxpayers, according to a report by the Treasury's Office for Budget Responsibility (OBR).
The independent watchdog projected that primary government spending could rise from 40 percent of GDP in 2030-2031 to 49 percent by 2075-2076 under its baseline scenario. This increase, driven by demographic changes and pressures on areas like health, social care, state pensions, defense, and Net Zero, could see public sector debt reach three times the size of the economy by the end of that period.
The OBR cautioned that if the country experiences economic shocks similar to recent years, public debt levels could become "very quickly unsustainable," potentially exceeding 1,000 percent of GDP. The report indicated that even with tax thresholds rising annually in line with inflation, public sector debt is still projected to increase to 150 percent of GDP by 2075.
Tax Implications
The report highlighted that current government policy, which has seen personal tax thresholds frozen for eight years, is already dragging more individuals into the tax system. If this trend continues and thresholds are not uprated in line with earnings, a future scenario suggests that around two-thirds of earners—approximately 47 million people out of an anticipated population of 71 million—could face paying the higher rate of income tax (40 percent or above) by the end of the 50-year projection period.
This scenario could see a full-time worker on the National Living Wage becoming a higher-rate taxpayer in the late 2060s. The OBR warned that such a sustained increase in average and marginal tax rates could lead to a significant negative impact on labor supply, potentially undermining revenue projections.
Fiscal Outlook and Government Response
The OBR noted that the UK's tax-to-GDP ratio is forecast to rise to 43 percent in 2030-31 from 37 percent in 2019-20, bringing it slightly above the average for advanced economies but still below the G7 average. The watchdog emphasized that while there is scope to raise taxes, doing so consistently over the long term to ensure fiscal sustainability would entail "increasing risks and worsening trade-offs."
The OBR stressed that its scenarios are not forecasts and that future governments would likely take action to prevent them. However, it also stated that addressing debt levels is "today's challenge, not tomorrow's," as the required fiscal adjustments become more costly and place a greater burden on future generations if delayed.
A spokesperson for HM Treasury stated that the government has an economic plan to manage shocks and that its deficit reduction plan is projected by the OBR to reduce borrowing each year of the current parliament, falling below the G7 average. The Treasury affirmed its commitment to economic stability through fiscal rules while increasing capital spending by over £120 billion.