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The UK is facing “daunting” risks to the public finances as its soaring debt load leads to “substantial erosion” of its capacity to respond to future shocks, the independent budget watchdog has warned.
The Office for Budget Responsibility said on Tuesday in its fiscal risks and sustainability report that efforts to put the UK on a more sustainable fiscal footing have met with only “limited and temporary” success in recent years.
Underlying public debt is at its highest level since the early 1960s and set to rise further, and addressing the issue has become “considerably more challenging” given low economic growth and rising interest rates, the OBR added.
“Against this more challenging domestic and global backdrop, the scale and array of risks to the UK fiscal outlook remains daunting,” it said. “The result has been a substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances.”
The report comes as chancellor Rachel Reeves faces renewed pressure to raise taxes in the autumn Budget given signs of a further deterioration in the health of the public finances.
U-turns on welfare reforms coupled with strains on the UK economy and the threat of productivity downgrades from the OBR could force tax rises or spending cuts exceeding £20bn in the autumn, economists say.
In its report, the OBR noted that the UK now has the sixth-highest debt, fifth-highest deficit, and third-highest borrowing costs among 36 advanced economies.
The report also highlighted additional pressures from the sustainability of state and private pensions as well as the costs of climate damage and the net zero transition.
Rising public borrowing in the UK and other advanced economies is creating wider pressures in global sovereign debt markets, the OBR added.
It noted that borrowing costs have risen further because long-term gilt yields are now higher in the UK than at any time since the start of the century.
Responding to the report, the Treasury said: “We recognise the long-standing economic realities the OBR sets out.
“This is why we are committed to ensuring stability in the economy through our non-negotiable fiscal rules, which have allowed us to invest in the UK to drive a decade of renewal and put more money in people’s pockets,” it added.
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