Pension pressure to help swell UK debt to three times size of economy
The growing cost of pensions is set to help swell UK public debt to three times the size of the economy and will place ‘unsustainable’ pressure on the public finances, the budget watchdog has warned, days after Andy Burnham pledged to retain the expensive triple lock after taking power.
In its annual report on the major fiscal risks facing the government, the Office for Budget Responsibility (OBR) revised up its public debt forecast in 2075 from 270 per cent as a share of GDP to 300 per cent. Public debt is hovering around 95 per cent, amounting to just under £3 trillion.
Economists at the independent body called on Labour to take “early action” to prevent the deficit from widening and curb debt that was on an “unsustainable and ever-rising path”.
Spending on the state pension is set to be one of the main drivers of rising public debt, with expenditure to grow from five per cent of GDP to around nine per cent in 50 years.
The triple lock, which ensures the state pension rises by whichever is highest out of annual earnings growth, inflation or 2.5 per cent, has become one of the heaviest burdens on UK taxpayers. The OBR’s assumptions suggest that the government could spend around five per cent of GDP less on the state pension if the triple lock was scrapped and replaced with inflation uprating.
Under the OBR’s central scenario where the triple lock is kept, it will drive 1.2 per cent of GDP out of the overall 3.6 per cent long-term rise in state pension spending.
Speaking to voters last week, Burnham said he will retain the policy upon taking power despite its ballooning cost. Successive governments of both parties have resisted scrapping the measure since its introduction by the Conservative government in 2010 in order to avoid alienating older voters. Reform UK have also pledged to back it.
Economists also warned that a possible delay on raising the state pension age to 68 by six years would cost taxpayers an additional £6bn in today’s terms.
The growing size of public debt is also set to be pushed higher by greater spending on the NHS and health, which will rocket from eight per cent of GDP to 13 per cent. Welfare spending on children and working-age adults is broadly projected to stay flat at around six per cent of GDP, according to OBR calculations.
By contrast, education spending could fall as a share of GDP due to changing demographics and falling birth rates.
Debt pressures is ‘Reeves’ legacy’
While tax receipts are on course to reach the highest level on record by the end of the decade, they could remain broadly stable as inheritance tax receipts increase as wealth effects gather.
Uprating tax bands by inflation rather than earnings growth could also deliver a large increase in receipts just as receipts from energy-related taxes wind down due to net zero and climate change, according to the OBR.
Shadow business secretary Andrew Griffith blamed the revision on public sector debt on Chancellor Rachel Reeves for failing to draw up long-term policies that protect UK taxpayers.
“In the last few days that Rachel Reeves is Chancellor, the OBR makes clear her legacy is higher debt today and deteriorating public finances tomorrow,” Griffith said.
“Sooner or later someone has to tell the hard truths and grip our unsustainable public finances.”