Tax hikes or cuts are needed to avoid an “unsustainable” government debt, Britain’s tax watchdog warned.
The Office for Budget Responsibility (OBR) said the government is facing a: indebtedness three times more than current levels due to rising costs from an aging population and declining future tax revenues from motor fuel.
Debt is on track to reach nearly 320% of GDP in 50 years — up from 96% currently — if successive governments don’t tighten fiscal policies, the agency said.
This is expected to rise to more than 100% of GDP in 30 years’ time.
To bring the debt down to 75% of GDP — the level at which it stabilized in the government’s pre-pandemic budget — “would have to increase taxes, decrease spending, or a combination of both,” the statement said. OBR.
This would require a curb of 1.5% of GDP – £37 billion a year in current terms – at the start of every decade over the next 50 years, it added.
Public sector debt, excluding public sector banks, stood at £2.3 trillion – or about 96.2% of GDP – at the end of March 2022 – an increase of £209.4 billion or 2.3 percentage points of GDP compared to March 2021, according to the US. It has reached levels not seen since the early 1960s.
“The pressure of an aging population on spending and the loss of existing car taxes in a low-carbon economy is putting public debt on an unsustainable path in the long run,” the OBR said.
Read more: Government hands over £7.6bn in record interest payment on government debt
The government risks losing a huge source of tax revenue as it plans to ban the sale of new petrol and diesel cars from 2030.
The UK’s aging population means additional costs for health care, pensions and social care.
The OBR also said that so far this year the government has spent as much to help households with the cost of living – 1.25% of GDP – as it has to support the economy during the financial crisis.
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The national debt is now more than double the amount that the OBR had expected twenty years ago.
The OBR said risks to public finances include: rising inflationthat could tip the economy recession“ongoing uncertainty about our future trade relationship with the EU” and a resurgence in COVID cases.
Other factors include rising interest rates and mounting geopolitical tensions, exemplified by Russia’s war in Ukraine and manifested in trade barriers between countries.
Government spent £7.6bn in interest payments in May to pay off its debtwell above the £5.1 billion the OBR had forecast.