UK on track to reach 330% public debt to GDP by 2075
The UK is on track to see debt reach 330 per cent of GDP by 2075, according to new modelling from the Adam Smith Institute;
Britain has entered a period of high existing debt, weak growth and an ageing population. Pension and health spending rise automatically, while a shrinking workforce limits tax receipts;
Debt could be stabilised if productivity growth returned to pre-2008 levels, health and pension spending were structurally reformed and through tax cuts.
The UK is on track to see debt reach 330 per cent of GDP by 2075, according to new modelling from the Adam Smith Institute.
The UK faces a structural debt spiral in less than a decade, with public debt-to-GDP accelerating from 2033. Eventually, this trajectory sees public sector net debt soaring to 330 per cent of GDP by 2075. If this were allowed to happen, the UK would likely require an international bailout, alongside unprecedented austerity measures.
The problem is not short-term profligacy but long-run arithmetic. Britain has entered a period of high existing debt, weak trend growth and an ageing population. Pension and health spending rise automatically, while a shrinking workforce limits tax receipts. Even if interest rates fall back from current peaks, debt will continue to escalate.
With anaemic growth and borrowing costs structurally higher than in the 2010s, deficits that once looked manageable now spiral out of control. Delaying adjustment will be costly: stabilising debt today would require permanent spending restraint of about 4 per cent of GDP, but postponing action by a decade raises the required adjustment by roughly 15 per cent.
Moderate fiscal adjustment and supply-side reform can prevent this disaster. If productivity growth returned to the heights achieved under Thatcher and Major and health and pension spending were structurally reformed, including ending the state pension triple lock, debt could be stabilised and eventually fall, creating room for broad based tax cuts.
Key findings:
The Adam Smith Institute’s new UK Fiscal Sustainability Model forecasts the UK’s public finances over the next 50 years.
The model reveals that, without reform, we face a structural debt spiral in less than a decade, meaning that the UK’s debt-to-GDP ratio would be expanding at an accelerating rate.
From 2033, the growth in public debt-to-GDP begins to speed up and, by 2075, public sector net debt could reach a staggering 330% of GDP.
This fiscal crisis is primarily driven by rapid increase in health and pension spending alongside slow economic growth and high levels of pre-existing debt.
But, this is not inevitable. Productivity growth, spurred by sensible tax cuts, alongside restraint in health and pensions spending, could get the UK’s finances back on track.
The longer the government waits, the harder change becomes. To restore fiscal sustainability, permanent spending cuts equal to 9% of government spending would need to be implemented from 2026/27. However, if this adjustment is delayed until 2037, cuts would have to be 15% larger.
To prevent fiscal collapse, the paper recommends bold supply-side reforms, immediate spending cuts, and, as growth returns, broad-based, considered tax cuts.
Mitchell Palmer, economist of the Adam Smith Institute, said
“People are right to be worried by the scale of the problem facing Britain's public finances. It is completely unsustainable.
“On the current trajectory, the UK government will owe more than three times the nation’s annual economic output by 2075. Without early, decisive action to bring down the deficit and increase growth, Britain will spiral towards higher taxes and weaker living standards.
“The only credible way out of this damning predicament is faster economic growth and serious restraint in public spending. Delaying reform simply locks in more pain for the future.”
Shadow Chancellor of the Exchequer, Sir Mel Stride MP said:
“As a country we are living beyond our means. Spending and borrowing are too high, and growth is far too low. The Labour government think that ever higher taxes is the answer, but that is only damaging our economy even more. We have to get public spending under control, especially the welfare bill, so that we can cut the deficit and cut taxes at the same time. If we do not, we will only drift further down the unsustainable path we are on.”
Notes to editors:
For any further details on the methodology, or to arrange an interview, please contact joanna@adamsmith.org / +44 7985540467
The full research is available here.
Methodology:
The UK Fiscal Sustainability Model is a spreadsheet model of the UK’s economy and public finances, developed in-house at the Adam Smith Institute. It is based on the methodology used by the New Zealand Treasury in compiling statutory four-yearly Statements on the Long-term Fiscal Position.
Estimates are built from the OBR’s medium-run forecasts until 2031. Thereafter, estimates are based on existing government policy or past experience, combined with the ONS’s mid-point forecast for the future age structure of the population.
Unless otherwise noted, estimates in this release are based on the Base Case scenario. The assumptions underpinning this scenario are in Table 2 of the report.
A more detailed explanation of the methodology is available in the Appendix to the report.
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