Rachel Reeves has been handed a damning “horror show” report card by the Office for Budget Responsibility, which warned Tuesday that Labour’s string of policy U-turns have left Britain’s finances in a “vulnerable position” with debt projected to reach a staggering 270 per cent of GDP by the early 2070s.
The OBR’s fiscal risks and sustainability report explicitly called out the Government’s benefits climbdown and defence spending hike for “creating new pressures on the public finances” as Britain faces what experts are calling “emergency level” fiscal challenges.
“Recent policy commitments create new pressures on the public finances, including the reinstatement of winter fuel payments for some pensioners, the reversal of welfare reforms, and the commitment to further increase defence spending to 3.5 per cent of GDP by 2035,” the OBR stated in its assessment.
Erosion of Fiscal Capacity
The independent fiscal watchdog delivered a particularly sharp critique of recent efforts to correct Britain’s public finances, noting they have been “met with only limited and temporary success in recent years.” The result, according to the OBR, “has been a substantial erosion of the UK’s capacity to respond to future shocks.
Maxwell Marlow of the free-market Adam Smith Institute think tank called the report a “horror show” and “emergency level stuff” which proves “the economy needs to be flipped on its head.
Former Chief Secretary to the Treasury Simon Clarke warned that Britain now faces “huge structural problems” in the wake of the OBR’s assessment.
Long-Term Debt Projections
The report’s most alarming finding projects that under current policy settings, public debt will balloon to more than 270 per cent of GDP by the early 2070s, driven by demographic pressures of an ageing population and rising costs of healthcare and other age-related expenditures.
“Over the long term, the demographic pressures of an ageing population and rising costs of healthcare and other age-related expenditures are still, on current policy settings, projected to push borrowing above 20 per cent and debt above 270 per cent of GDP by the early 2070s,” the OBR analysis stated.
The watchdog also highlighted how the shift from defined benefit to defined contribution pensions creates additional fiscal risks by reducing demand for UK government debt. The OBR projects that gilt holdings by the pensions sector will at least halve as a share of GDP by the early 2070s.
Interest Rate Pressures
This decline in pension sector gilt holdings could push up interest rates on government debt by approximately 0.8 percentage points, assuming debt remains close to 100 per cent of GDP. The OBR warned that higher interest rates would be needed to attract more price-elastic buyers than pension funds, such as overseas investors.
“With debt at 100 per cent of GDP, this could eventually increase debt interest spending by £22 billion (in today’s terms),” the report calculated.
The analysis comes as the Chancellor faces mounting pressure over her fiscal strategy. Last July, Reeves handed the OBR greater oversight over the Treasury, with ministers now legally bound to consult it before every major fiscal event.
Global Risks Crystallize
The OBR noted that several major global risks have materialized and remain a significant source of uncertainty around the medium-term fiscal outlook. Rising geopolitical tensions have led to the largest increase in effective global tariff rates in over a century and put pressure on the UK and other European countries to increase defence spending to their highest levels since the Cold War.
As foreshadowed in our 2022 report, rising geopolitical tensions have given rise to the largest increase in effective global tariff rates in over a century and put the UK and other European countries under pressure to increase defence spending to their highest levels since the end of the Cold War,” the report stated.
Retirement Income Crisis
The OBR also warned of a looming retirement income crisis, particularly affecting the self-employed. Fewer than one-in-five self-employed workers are enrolled in a private pension scheme, compared with over four-fifths of eligible employees.
“As a result, around three-fifths of the self-employed are projected to miss both the target replacement rate and the minimum living standards benchmark,” the report found. This leads to direct fiscal costs through pensioner benefits and potentially wider pressure to support those who have spent much of their working life in low-earning and less secure forms of self-employment.
Recent Fiscal Performance
The timing of the report is particularly damaging for Reeves, who has already faced criticism for leaving herself minimal headroom against fiscal rules. In her spring statement earlier this year, she was forced to make £4.8 billion in welfare cuts and find additional revenue just to maintain the same £9.9 billion of headroom she had in October.
The Institute for Fiscal Studies criticized this approach, with director Paul Johnson noting that “policy is seemingly being fine-tuned in pursuit of an arbitrary and highly uncertain measure of ‘fiscal headroom’.”
What Happens Next
The OBR’s stark warnings come as speculation mounts about potential tax rises or spending cuts in the upcoming autumn budget. The watchdog has already admitted to “optimism bias” in its previous forecasts, having overestimated growth by an average of 0.3 percentage points at the two-year horizon and 0.7 points after five years.
With the OBR now conducting a full evaluation of the economy’s speed limit, economists warn that a downgrade to productivity forecasts could require Reeves to find up to £20 billion through tax rises or spending cuts to maintain her fiscal rules.
The report represents a comprehensive indictment of Britain’s fiscal position and raises fundamental questions about the sustainability of current spending commitments amid mounting global economic headwinds and demographic pressures.
Follow for more updates on Britannia Daily
Image Credit:
The Chancellor of the Exchequer and the Secretary of State for Defence hold a roundtable with the Defence & Economic Growth Taskforce – Image by HM Treasury, licensed under CC BY 2.0, via Wikimedia Commons.
