Public finances facing risky future

The government faces three “potentially catastrophic” sources of financial risk, the Office for Budgetary Responsibility (OBR) watchdog has said. According to the OBR’s latest fiscal risks report, these are: the Covid pandemic, climate change, and public debt.

The OBR says that the pandemic could leave £10 billion per year in spending pressures and long-term economic “scars”. Meanwhile, it believes that, while unmitigated climate change would spell disaster, the net fiscal costs of moving to net zero emissions by 2050 may be comparatively modest.

It notes that while interest rates touched historical lows during the pandemic, the public finances are increasingly exposed to future rate rises due to a higher debt stock and a shortening of its effective maturity. Government debt now stands at some £2.2 trillion, or 99.2% of GDP, a rate not seen since the early 1960s (see Fact Service issue 25).

The OBR says that the government bill for emergency measures such as the furlough scheme continues to climb, increasing the debt. While it notes that the Treasury intends to address this by cutting future (non-Covid) spending, and increasing corporation tax from 19% to 25%, these would not cover continuing Covid-related costs. These include reducing the backlog of procedures in the NHS, maintaining test and trace, funding catch-up education, and supporting public transport, which has seen drastic reductions in passenger levels.

https://obr.uk/hero/fiscal-risks-report-2021-2