The Office for Budget Responsibility [OBR] has warned that UK debt is on an “unsustainable path”, with rising inflationary pressures and an ageing population leaving the country at risk of recession.
The forecaster has recommended that government spending is reined in, and/or taxes are increased to bring the national debt down to 75 per cent of GDP, matching pre-pandemic levels as outlined in the March 2020 Budget.
Inflation currently stands at a 40-year high of 9.1 per cent, meaning that households have been forced to limit their spending. This has seen the economy contract for two consecutive months over March and April 2022.
Meanwhile, the government’s aims to transition toward a greener economy are also posing their own risks. The drive toward green vehicles, with the sale of new petrol and diesel cars to be banned from 2030, will mean that tax revenue from fuel duty will take a significant hit.
The OBR said: “The pressures of an ageing population on spending and the loss of existing motoring taxes in a decarbonising economy leaves public debt on an unsustainable path in the long term.”
The OBR also warned that the impact of the Ukraine conflict combined with inflation “add up to a challenging outlook for this and future governments as they steer the public finances through inevitable future shocks.”
In response to inflation, the Bank of England has hiked interest rates which has seen interest payments hit £7.6 billion in May, the highest level for that month on record. It is also a £3.1 billion rise on the levels seen in May 2021.
The OBR outlined that the 1.25 per cent of GDP spent by the government this year on helping people adjust to rising prices has already matched the investment that went into stabilising the economy during the financial crash of the late 2000s.
The forecaster adds: “Many threats remain, with rising inflation potentially tipping the economy into recession, continued uncertainty about our future trading relationship with the EU, a resurgence in Covid cases, a changing global climate, and rising interest rates all continuing to hang over the fiscal outlook.”
The future forecast was also a gloomy one, with the OBR suggesting debt levels could treble or more within 50 years.
What is for certain, is that Boris Johnson's successor as prime minister will have plenty on their plate if they are to deliver economic prosperity.
As the process begins to identify the outgoing PM's successor, businesses have called for stability and for the "political vacuum" vacated by Johnson to be filled as soon as possible in order to enable that.
Confederation of British Industry [CBI] director general, Tony Danker, said that the new prime minister's "number one focus" needed to be "getting the economy growing again."
Meanwhile, the Institute of Directors has fired off the warning that "what business hates most is uncertainty and instability" and that businesses needed to be given the confidence to invest to stimulate the economy.
Business secretary Kwasi Kwarteng wrote on Twitter: "We now need a new leader as soon as practicable. Someone who can rebuild trust, heal the country and set out a new, sensible and consistent economic approach to help families."
Asda chairman and Tory peer Lord Rose, said that it would be "unsustainable to continue with a hamstrung, lame duck prime minister into the autumn" and said that the "political crisis" around Johnson's position as PM had "hamstrung" attempts to deal with "the serious issue of the economy."
Photo by Sarah Agnew on Unsplash
