OBR warns unfunded spending to damage UK finances amid ‘daunting’ risks
The UK economy is set for a “daunting” year as the Office for Budget Responsibility (OBR) has warned unfunded spending commitments and global trade tensions are likely to damage public finances.
Chancellor Rachel Reeves is facing pressure to assuage Labour backbenchers by not cutting welfare spending while also upholding a pledge not to raise tax “on working people.”
But the fiscal watchdog has warned that government decisions have added fresh risks to the already strained public finances.
In a new report published on Tuesday, the OBR warned that recent U-turns on welfare reforms and winter fuel payments, which are “not reflected in medium-term forecasts and budgets”, will put greater strain on public finances.
OBR analysts also highlighted spending commitments on defence, which will increase to five per cent as a share of GDP by 2035 and require spending to rise by a further £38.6bn, and President Trump’s tariffs as likely to damage the UK economy.
Should Trump’s sweeping ten per cent tariffs be implemented in the coming weeks, up to 0.3 per cent of GDP could be hit.
The OBR’s most dire warnings came on welfare and healthcare spending, which could push borrowing above 20 per cent and public debt above 270 per cent of GDP by the early 2070s due to the UK’s ageing population. The body noted that the UK deficit, at 5.7 per cent of GDP, is the third highest among the 28 advanced economies and the debt burden – at 94 per cent of GDP – is the sixth-highest in the developed world.
Cyber attacks on national infrastructure could also lead to borrowing increasing by 1.1 per cent of GDP, estimates found, as the watchdog conducted a wide-ranging review of possible risks to the UK economy.
The set of risks outlined would come as the UK economy has struggled to respond to shocks, with underlying public debt now at its highest level in around 60 years and global sovereign bond yields spiralling.
“Against this more challenging domestic and global backdrop, the scale and array of risks to the UK fiscal outlook remains daunting,” the OBR’s report said.
“While most advanced economies have seen their deficits and debt increase since the pandemic, the UK stands out for running persistent large deficits and a relatively high debt stock in the face of rising interest rates, slowing growth, an ageing population, and rising geopolitical and trade tensions.
“With its 10-year bond yielding 4.5 per cent as of June 2025, the UK government faces the third-highest borrowing costs of any advanced economy after New Zealand and Iceland.”
OBR warning on net zero
The OBR also suggested that the risk of the transition to net zero on public finances had increased, partly due to the possibility of new technologies failing to work. They also cite high taxation along with future financial crises and sky-high debt as major risks.
The mix of short terms and long term risks to public finances will likely alarm Rachel Reeves and other Treasury officials.
City analysts believe the government will have to raise up to £30bn in taxes later this year, with the likes of wealth taxes, an extension of income tax thresholds and dividend levies being floated by former politicians and analysts.
Rachel Reeves may yet decide to raise taxes higher in order to build a bigger fiscal buffer than her previous £9.9bn, among the lowest headrooms built by any Chancellor since the OBR was created 15 years ago.
Andrew Griffith, shadow business secretary said: “The OBR are saying what every business is thinking: that the economy has sailed into an iceberg alley with a novice Chancellor at the helm and the ships crew revolting.”
A Treasury spokesperson said: “We recognise the long-standing economic realities the OBR sets out in its report.
“This is why we are committed to ensuring stability in the economy through our non-negotiable fiscal rules which have allowed us to invest in the UK to drive a decade of renewal and put more money in people’s pockets.”