It has become fashionable to call for an end to austerity, but our public finances still look dangerously overstretched, as a report by the Office for Budget Responsibility (OBR) made clear last week. Many are sanguine about our debt pile of £1.7trn, or 89% of GDP, because the average maturity is 15 years, around double that of other G7 countries, says Philip Aldrick in The Times. But the debt pile has more than doubled since the crisis, and periods of growth need to be used to get borrowing under control, to provide the “fiscal space” for another downturn, as the OBR says.
Right now, there isn’t any space. The OBR put the public finances through the same stress test as the banks, involving a recession accompanied by inflation of 5% and interest rates of 4% to combat price rises. In five years, this scenario would add another 34% of GDP worth of debt to the pile. Compared with 2007, the debt is four times more sensitive to rate rises – given how low they are now – and two and a half times more sensitive to movements in RPI inflation. A fifth of the debt is index-linked, with interest climbing in line with RPI.
A recession is inevitable sooner or later, and they have averaged one per decade since the 1970s, says Aldrick. And then there is the long-term impact of an ageing society, which requires higher spending on health and care. This expenditure could jump from 6.9% of GDP in 2021 to 12.6% in 2066, says the OBR. Along with weak productivity growth, it is one of the biggest “slow-building fiscal pressures”, according to the OBR. Finally, the Brexit process could also put a dent in the public finances if there is a bumpy transition to an eventual deal, undermining growth and productivity for several years.