Alarming OBR forecast is too optimistic – debt is set to be 647 per cent of GDP
The OBR is being far too optimistic in its assumptions about productivity growth in the UK – meaning the scale of the country’s debt problem is even greater than it appears, says Ben Ramanauskas
According to the OBR’s forecast, the National Debt is projected to be over 270 per cent of GDP by the 2070s. This in itself is alarming enough, but the outlook is actually even worse. The OBR assumes that productivity growth will average around 1.5 per cent over this period – but in reality it has been closer to a paltry 0.5 per cent in recent years. If this trend continues then the National Debt will balloon to 647 per cent of GDP by the early 2070s.
This is unsustainable. The country already spends over £100bn each year servicing the National Debt, which is higher than the budgets for other departments including defence, education, and the criminal justice system. By even the most optimistic assumptions of the OBR this looks set to drastically increase.
If things continue on their current trajectory then it will be future generations who are left to clean up the mess caused by our profligacy. They will see a higher proportion of their income taxed, not to pay for essential public services such as education and healthcare, but to fund the current Government’s reckless spending.
This should be a wake up call to politicians of all parties. Bold action needs to be taken now in order to reduce the National Debt and avoid this nightmare scenario.
How to avoid a debt nightmare
First, the Government must start to cut public spending.
We need to radically reform the welfare state. It should provide a robust safety net for those who are genuinely unable to work while ensuring that those who can work, do so, as set out in Policy Exchange’s paper, ‘For Whose Benefit?’ The Government’s recent u-turn on the Welfare Bill will make this more difficult.
The Government also needs to reform the state pension. The triple lock was highlighted in the OBR’s report as three times more expensive than expected, with its annual cost estimated to rise to £15bn by 2030. Linking the state pension instead solely to average earnings – or solely to inflation – would alleviate this pressure, while still guaranteeing a fair deal for pensioners.
Second, the Government needs to urgently embark upon a productivity drive.
The OBR assumes that productivity growth will average around 1.5 per cent over this period – but in reality it has been closer to a paltry 0.5 per cent in recent years
Productivity is the key driver of economic growth. The current Government has recognised the important role played by housing and energy infrastructure in boosting productivity. It has signalled its intention to speed up the approval process for planning permission – but needs to ensure that it follows through on this commitment. This is the only way that the transport and energy infrastructure as well as the offices, labs, and millions of new homes we need can be built.
The Government must also look at reforming the tax system. It should ignore the calls from its own backbenchers to increase taxes to even higher levels as that will only suppress economic growth. Tax reforms should be targeted on alleviating the most damaging taxes on employment, removing cliff edges and thinking again on the newly imposed taxes that are driving high-earning taxpayers overseas, and start instead incentivising investment and rewarding hard work.
The OBR’s report should alarm us all. The National Debt is already far too high and is set to reach astronomically high levels in the coming years and decades. The Government needs to take action now to bring public spending down to more sustainable levels while doing whatever it takes to boost productivity – or the price will be paid by future generations.
Ben Ramanauskas is a senior research fellow in economics at Policy Exchange