UK finances in vulnerable position, warns OBR

The Office for Budget Responsibility has warned that the UK’s public finances are in a vulnerable position.

In a report published on Tuesday (8 July), the group noted that efforts to put the UK’s public finances on a sustainable footing after a series of global shocks have met with only limited and temporary success in recent years, leaving the UK with the sixth-highest debt, fifth-highest deficit, and third-highest borrowing costs among 36 advanced economies.

Against this more vulnerable backdrop, the risks to the fiscal outlook are mounting, including:

The sustainability of state and private pensions and the sector’s demand for government debt;
Risks to assets and liabilities on the public balance sheet and the Government’s new net financial liabilities target;
The combined costs of climate damage and the net-zero transition.

Warning over future shocks

The result has been a substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances, the group said.

“Underlying public debt is now at its highest level since the early 1960s and is projected to rise further over the medium term. Arresting this increase has become considerably more challenging as economic growth has slowed and interest rates risen.

“Despite the tax-to-GDP ratio rising to the highest level in the period since 1950, borrowing is still 3% of GDP above the level that would be needed to durably stabilise debt.”

It added that the government has left itself very small margins against its objectives of restoring the current budget to balance and getting net financial liabilities to fall by the end of the decade.

“Despite this, public expectations of what government can and should do in response to emerging threats and future emergencies seem to be rising,” it said.

The group noted that there are signs that the scale of public borrowing in the UK and other large, advanced economies is putting global sovereign debt markets under pressure.

“Government borrowing costs have risen across the world and long-term gilt yields are now higher in the UK than at any point since the start of the century.”

It added that uncertainty about the future path of inflation and fiscal policy in the US, Europe, and Japan has fuelled persistent volatility in sovereign bond yields since the start of the year.

“And governments in the UK and across advanced economies have shortened the maturity of their new borrowing and are increasingly looking abroad for investors as domestic appetite for their longer-dated debts wanes.”