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 aging population and increased defence spending. In its latest fiscal risks and sustainability report, the independent forecaster said that without government intervention, debt would move onto an unsustainable, ever-upward path from around the 2040s.
Defence spending requires additional £28bn annually
The OBR stated that defence spending would need to increase by an additional £28bn per year to meet the government's promise 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, but the scale of the increase underscores the fiscal challenge.
Health and pension costs add pressure
The OBR also highlighted rising costs in health and pensions as major pressures on public finances. State pension spending could increase from 5% of GDP to 9% over the next 50 years if current policies remain unchanged, with a third of that rise attributed to the triple lock, which increases pensions by the highest of earnings, inflation, or 2.5%. Switching to increasing the state pension based solely on average earnings would save 2% of GDP by the end of the period.
Health spending is projected to rise from 8% of GDP to 13% by 2075, as the proportion of older people in the population grows. The OBR noted that spending growth could be constrained if productivity in the health sector improves.
Debt trajectory and need for early action
While Chancellor Rachel Reeves' 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 that this could happen earlier if the government fails to stick to ambitious plans for narrowing the deficit over the next few years, or if the economy suffers another major shock. However, stronger economic growth could delay and shallow the rise in the debt-to-GDP ratio if the proceeds are used to repair public finances.
Josephs emphasised that earlier action to repair public finances would require a less dramatic adjustment. "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 said. He added that the shift required would be twice as large if implemented in the middle of the century rather than the early 2030s, concluding that "doing this earlier would be less costly than delaying the required fiscal adjustment."
OBR leadership vacancy
The OBR has been without a permanent director since last December, when Richard Hughes resigned over the inadvertent early release of budget details. Reeves' nominee as his successor, economist Jonathan Haskel, is yet to be confirmed in the post.
