Government debt repayment ‘could rise to half’ of total taxes
Children and young people today could see nearly half of their taxes spent on servicing government debt, new modelling by a favoured Labour think tank has suggested.
Research by the Institute for Public Policy Research, a left-leaning think tank that was formerly the workplace of several Labour ministers and advisers, has shown that debt interest could equal about a fifth of total government revenue by 2075.
A report on the long-term fiscal problems facing the UK economy has suggested that debt interest payments could wipe out some 47 per cent of total income generated by the government in a worst-case scenario.
In the think tank’s most-likely case, debt payments would come to nearly 21.3 per cent of government revenue.
IPPR economists warned that, without reform, the youngest members of Generation Z and those in Generation Beta, who are born between 2025 and 2039, would be severely disadvantaged by the scale of interest payments on government debt.
Debt interest payments in the current financial year are projected to total £110bn, around the size of the education budget and nearly double the amount that is spent on defence.
Currently, it means that the UK government spends just over eight per cent of total public expenditure on servicing its debt and about 3.6 per cent of GDP.
Debt interest payments have risen in line with higher UK gilt yields, which have spiked in part over fears around Labour’s looser fiscal policies and an inability to rein in government borrowing via effective tax rises or limits on state expenditure.
The IPPR based its calculations on available data measured by the Office for Budget Responsibility (OBR), the government’s fiscal watchdog. OBR chiefs have warned that health spending and pensioner spending is set to rise as a proportion of GDP while productivity growth could take a toll from new shocks related to climate change.
New fiscal rule around debt servicing cost
While economists urged Chancellor John Healey to stick to the fiscal rules until at least 2030, they suggested that a new fiscal framework should later distinguish borrowing for long-term investments that boost productivity and borrowing that “merely adds to liabilities”.
The main fiscal rule, designed by former Chancellor Rachel Reeves, states that tax receipts should match or exceed the current budget – which covers day-to-day spending on areas such as staff wages – in the third year of a rolling fiscal forecast period.
The second fiscal rule states that public sector net financial liabilities, a measure of debt that counts a broader range of financial assets on the Treasury’s balance sheet, should fall as a share of GDP in the third year of the forecast window.
William Ellis, a senior economist at IPPR and co-author of the report, said the government should only re-consider the fiscal rules “from a position of strength” once it has consistently met its fiscal rules and ensured that plans for the current budget and level of public debt remained credible.
A new framework would consider the “long-term benefits” of health measures, industrial policy and net zero action, as well as include a dashboard that provides financial data on short, medium and long-term horizons, according to economists.
The calls appear to align with the views of the chancellor of the duchy of Lancaster, Louise Haigh, one of Burnham’s closest allies. She hit out at the OBR’s “unaccountable orthodoxy” for only estimating the short-term impacts of growth measures and public spending while calling for longer-term fiscal horizons.
The think tank warned that fiscal sustainability would also be measured by the proportion spent on debt servicing as a share of total expenditure, with a “backstop” in place in case a ratio rises above a critical threshold of 15 per cent. This would wipe out the focus on fiscal headroom as a “basket of metrics” to be monitored by Treasury officials.
“A reformed framework should make the trade-offs between short term investment and addressing long term problems visible,” Ellis said.
“Fiscal plans should be held to account on the debt servicing ratio, supported by a dashboard of indicators, and underpinned by a long-term strategy”.