This Government’s No. 1 mission is to grow the economy. Sustainable public finances support the stability necessary for a successful economy; the stability that allows a family to buy their own home, for a business to thrive and for a Government to invest in public services. The Office for Budget Responsibility’s fiscal risks and sustainability report (CP 1142) laid today and based on the previous Government’s spring Budget policies, shows the substantial longer-term challenges to the sustainability of the public finances.
As set out in the public spending audit (CP 1133) laid in July, the previous Government left a challenging fiscal inheritance, with a projected overspend of £22 billion. This Government have already taken action to begin fixing the foundations, including £5.5 billion in public spending savings for 2024-25. Further difficult decisions will be needed at the autumn Budget across spending, welfare and tax in order to meet the fiscal rules and to support sustainable economic growth. This is the responsible thing to do to fix the foundations of our economy and bring back economic stability.
Sustained economic growth is the only route to the improved prosperity that the UK needs. Had the UK grown at the average rate of other OECD economies over the last 13 years, the economy would have been over £140 billion larger and this could have brought in an additional £58 billion in tax revenues in the last year alone. Growth is therefore this Government’s defining mission, and one pillar underpinning this mission is stability. Economic stability will allow us to grow the economy, maintain sustainable public finances, and keep taxes, inflation and mortgages as low as possible.
Economic stability requires respecting the institutions that are guarantors of our stability and we have already demonstrated our commitment to strengthening independent institutions, including the OBR. In July, I announced the most significant set of changes to our fiscal framework since the inception of the OBR. This included introducing the Budget Responsibility Act, ensuring that any major future fiscal announcements will be subject to an independent assessment by the OBR, as well as confirming that spending reviews will take place every two years with a minimum duration of three years in order to improve value for money and the planning of public expenditure, and to provide greater budgetary certainty. The Government are also committed to robust fiscal rules that will ensure the public finances are always managed responsibly.
The FRS— fiscal risks and sustainability report—builds on previous years’ analysis, examining the risks posed to the public finances by climate change damage, health spending and debt sustainability. The OBR’s analysis shows that the UK will face significant costs from climate-related damage, even in a scenario where the UK and the rest of the world continue with current mitigation commitments. The costs would be more severe if these commitments are not met, which is why one of the Government’s missions is to make the UK a clean energy superpower. The Government have already acted to remove the de-facto ban on onshore wind, approve three major solar projects and significantly increase the budget for the sixth contracts for difference round. The Government will work with the private sector through the newly founded Great British Energy, capitalised with £8.3 billion. Preparing for the future also means adapting to the effects of climate change. Without action, flooding, coastal erosion and other climate hazards will pose greater risks to lives, livelihoods and people’s wellbeing. The Government will explore how to further strengthen our approach to developing the country’s resilience to climate change, working to improve resilience and preparation across central Government, local authorities, local communities, and emergency services.
The FRS sets out that rising health spending is forecast to be the single most important driver of public debt increasing over the next 50 years. It also shows that a healthier population brings economic and fiscal benefits. The health mission will ensure that we build an NHS fit for the future that is there when people need it, with fewer lives lost to the biggest health-related killers, in a fairer Britain where everyone lives well for longer.
The final chapter of the report assesses the UK’s debt sustainability. Public debt is projected to reach 274% of GDP in 2073-74, based on a number of long-term spending pressures and the previous Government’s policies remaining unchanged. However, boosting the productive potential of the economy can help to reduce this rise in debt, with the OBR’s analysis showing that every 0.1% increase in annual productivity growth would reduce the increase in the debt-to-GDP ratio by 25 percentage points. A full one percentage point increase in annual productivity growth to 2.5%, equivalent to a return to pre-financial crisis rates of productivity growth, could keep debt below 100% of GDP throughout the next 50 years. This underlines the importance of tackling the UK’s weak productivity performance through the Government’s growth mission. Since the launch of the growth mission in July, the Government have wasted no time in making progress and have already announced several growth-enhancing policies, guided by the principles of stability, investment and reform.
Economic shocks have been the most significant driver of rising debt in recent years. Through the spending review process, the Government will take forward work on a number of priority themes, including a greater focus on long-termism and prevention, to improve the resilience of the economy to future shocks.
The FRS highlights the challenging fiscal outlook faced by this and future Governments, and underlines the importance of growth and stability. I am grateful to the staff of the OBR for the work and expertise that has gone into this report, which fulfils the body’s obligations in the “Charter for Budget Responsibility” to examine and report on the sustainability of, and risks to, the public finances. The Government will respond to the FRS in the spring.
[HCWS95]