Market News

BY Chris Price

Britain risks an “explosion” in the national debt under Rachel Reeves’s spending plans, the Office for Budget Responsibility (OBR) has warned.

Prof David Miles, a member of the fiscal watchdog’s Budget Responsibility Committee, on Tuesday said long-term forecasts for the nation’s public finances were “very worrying indeed”.

He told the House of Lords economic affairs committee that the ratio of debt to GDP would surpass 270pc by the 2070s if the UK follows its current debt path.

It comes as the Chancellor faces scrutiny over the public finances following her Budget last month, which the OBR has warned will push up government borrowing

UK is on ‘unsustainable path’

Prof Miles said: “We do show pictures that are very worrying indeed about our long-term fiscal sustainability.

“Indeed, we’ve argued for a few years now that on current tax and spending settings, the UK is almost certainly on an unsustainable path.

“And indeed we show projections on the stock of debt to GDP rising, several decades down the road, to something approaching 300pc.

“That’s not a forecast. That couldn’t happen because there’d be some juddering explosion some way down the road if you were on that path.”

Britain’s debt is forecast to climb to 96pc as a percentage of GDP by the end of the decade, up from its current level of 95pc.

In the watchdog’s latest fiscal risks and sustainability report, it warned that the UK will have a debt to GDP ratio of over 270pc in 2073-74 if government debt continues to rise in line with projections.

The warning came as jobseekers continue to grapple with a cooling jobs market.

Figures released by the Office for National Statistics (ONS) on Tuesday showed that unemployment rose to 5.1pc in the three months to October - the highest level in almost five years.

The signs of weakness come as the Bank of England prepares to announce its next interest rate decision on Thursday. Analysts expect the Bank to lower the cost of borrowing for the first time since August.

Despite rising unemployment, public sector wage growth has risen at its fastest rate since records began in 2001, according to the ONS.

State-employed workers saw their pay rise by 7.6pc last year - almost double the 3.9pc increase in the private sector.

Official data published last week added to the gloom, showing the economy shrank by 0.1pc in October after a similar fall in September and no growth in August.

Debt is ‘ratcheting up’

It comes as the UK spends significant sums on debt interest. The Chancellor has already borrowed £116.8bn this financial year to plug the gap between tax receipts and public spending.

Debt interest payments are expected to remain above £100bn a year for the rest of the decade.

Meanwhile, the OBR has warned policies announced in the Budget will push up borrowing by £6bn next year before reducing it by £15bn by the end of the decade.

Tom Josephs, another member of the OBR’s Budget Responsibility Committee, told peers: “Despite successive governments having some kind of target for debt to be falling, what you’ve actually seen in the outturn is debt ratcheting up.”

The latest projections from the OBR show that under the Chancellor’s plan, borrowing is projected to fall from 4.5pc of GDP in 2025-26 to 1.9pc of GDP in 2030-31.

The appearance of OBR members in the Lords marks the latest scrutiny of the fiscal watchdog.

Last week the Treasury select committee announced the OBR would face a review over its performance since it was set up in 2010.

The announcement comes after Richard Hughes, its former chairman, resigned following a leak of sensitive economic forecasts ahead of the Budget.

Nikhil Rathi, the boss of the Financial Conduct Authority (FCA), told the Treasury committee on Tuesday that the watchdog has not yet seen any insider trading following the leak of the information.