Speaking before the Treasury Select Committee today (28 November), OBR chair Richard Hughes explained the current set of fiscal rules implemented by the government target debt to fall over the next five years.
However, Hughes noted “that deadline shifts”, allowing the government to push up debt in the four years leading up to the target.
He evidenced this by pointing to the OBR’s latest forecast, which showed Chancellor Jeremy Hunt had taken “full advantage” of this fact and had “reduced his margin against getting debt falling” in 2027/2028.
This has created a “wafer thin” margin for debt to have fallen in that financial year, he said.
Debt would have been £85bn in five years’ time if the chancellor had not taken any action at the Autumn Statement, Hughes added – about 3% of GDP.
The chair pushed back against Hunt’s claim the Autumn Statement had been the largest tax cut since the 1980s, stating it was “not a figure we have used”.
Instead, he noted this was the “third largest” discretionary fiscal loosening since the OBR was founded in 2010, after March 2022 and the furlough scheme.
While the OBR members speaking before the committee praised the cuts to National Insurance, they noted the negative effects that frozen tax thresholds were having, pushing the tax burden to a post-war high of 38% of GDP.
“In five years’ time, the average worker, based on current policies, is going to be paying more in tax because the thresholds are frozen,” Hughes said.
The UK spends more servicing its debt than any other G7 country in terms of total tax receipts, and Hughes said this was “putting more and more pressure on the public finances”.
He noted that debt repayments for the UK now totalled £100bn a year, “second only to the National Health Service as a single spending item”.
David Miles, economist on the OBR’s budget responsibility committee, said rising interest rates were putting further pressure on the size of debt repayments. MPs asked whether the UK was at risk of entering a ‘debt trap’, to which Miles said it was becoming “a bit more difficult” to avoid.
When asked whether the Autumn Statement was inflationary, Hughes said the OBR had estimated a 0.1 percentage point rise in the price level over five years, which he argued would not be described as “material” for its forecasts.
Instead, the OBR raised its forecasts for inflation over the next five years largely for macroeconomic reasons, he explained, as the labour market is “proving tighter” and pay negotiations are indicating “higher pay settlements are likely to persist into the medium term”.