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The focus of politicians is, if they are fortunate enough not to have to survive merely the next few weeks, inevitably the next two or three years. That is how being in government works. But what they decide affects us all 20, 30 or more years ahead.
So we should welcome the work of the Office for Budget Responsibility (OBR), which this week published its look into the future of public finances right through the next 50 years. The report is called “Fiscal risks and sustainability”, and it is not pretty reading.
Among the unpleasant messages are that on present trends, the government’s debt will rise to 300 per cent of GDP by 2075, that healthcare will jump from 8 per cent of GDP to 13 per cent, that debt interest (which has doubled in the past six years) will reach 12 per cent of GDP, and that state pensions will go from 5 per cent of GDP to 9 per cent of GDP. The nation’s finances, it says, are on an “unsustainable and ever-rising path”.
The sooner the government acts, the smaller the scale of the adjustment, but even to stop the national debt rising relative to GDP it will have to make a permanent fiscal adjustment of 3.8 per cent of GDP by 2031-32.
To put this in some sort of perspective, think about the hot debate at the moment as to whether Andy Burnham is right to give a commitment to keep the triple lock on the state pension – that’s whereby the rate goes up by the lowest of three factors, average wages, inflation, and 2.5 per cent. But ending the triple lock is not nearly enough to hold the cost of pensions steady. The number of older people in the UK population is climbing so fast that to do so would only cut the increase in spending on the state pensions by one-third.
To be sure, as the OBR makes clear, these are only projections – a “what will happen if nothing changes” exercise. Things will change over the next half century. Think back 50 years and the nation’s finances were in an even greater mess than they are now. For 1976 was the year when Denis Healey, the Labour chancellor, had to go for an emergency loan from the International Monetary Fund, accepting savage cuts in public spending to get it. Yet by 1997, when Gordon Brown became chancellor, finances were massively improved, enabling him to run a surplus right through from 1997-98 through to 2000-01.
But less than a decade after that, the financial crash of 2008-09 struck and the deficit had shot back up to more than 10 per cent of GDP. That was the highest ever in peacetime, until the pandemic struck in 2020 pushing it to over 14 per cent of GDP. Paying for that is part of the problem now.
So what will happen? There will have to be some combination of higher taxes and lower public spending. That is not a political statement. It is a mathematical one. The numbers do not add up. The question is whether making the numbers balance will happen in an orderly or disorderly way, and it is impossible to give a view on that. After the banking crash the coalition and Tory governments cut spending and increased taxes so that by 2017-18 the budget deficit was down to 2 per cent of GDP.
But that was deeply unpopular, and in any case there was the tailwind of low borrowing costs as inflation and interest rates fell. It will be tough to make that sort of orderly correction again.
If it is tough for governments it will be tougher for us ordinary folk, because one way or another we have to foot the bill. The practical implication is that we have to save more. People are not stupid, and you can see that already happening. Households are saving nearly 9 per cent of their income. That’s down a bit from the peak at the end 2024, and much lower than during the pandemic, but towards the top end of the level since 2000. Saving for private pensions has risen as a result of the auto-enrolment scheme which came into force in 2012.
It’s not just about pensions. We are, as a country, starting to rely more on ourselves and less on the government in a whole range of different areas. For example there is a trend for people to pay for medical care out of their own pocket, rather than relying on the NHS. There is a boom in private health insurance. Families are stepping in to help pay for university fees, rather than have students borrowing so much from the government. And there is the famous Bank of Mum and Dad which is now helping roughly half of all first-time buyers.
The challenge, and it is a huge one, will be how to marshal this evident desire for people to take more control over their financial future in such a way that anyone who can’t do so can still manage to get by. It is a trend that works for families that plan carefully and have something behind them, but risks nasty outcomes for those who don’t. Not easy.
But those OBR projections are scary, and the only way to cope with them will be to rely more on ourselves and less on some government far into the future.
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For those of use who reported on the 1976 financial crisis it was also a scary time. There was the famous event of Denis Healey turning back at Heathrow, when he was supposed to be flying out to the IMF meeting in Manila, as there was a sudden run on the pound and he thought he should stay in London.
I was reporting on the meeting and well remember the sense of shame. I said to the head of one of our biggest banks that I didn’t think I would bother to go to the reception at the British embassy. “Look,” he replied, “there are not many of us here, it’s been deeply humiliating, and the very least you can do is show up to our place here tonight.”
I remember, too, Healey telling a group of us over a dinner we held for him after the Tory victory in 1979 that getting the Cabinet to agree to the IMF terms had been the toughest few days of his life. He knew we had to get the money but he wasn’t sure Jim Callaghan, the prime minister, would support him. Several members wanted to refuse the deal. It wasn’t until Callaghan swung round on his side that he knew it would be all right.
But the most searing memory I have was talking with the top civil servant on the international side at the Treasury, who was white-faced. “You do realise,” he said, “that we have only got the reserves for another six weeks of imports. We have to have this loan or we can’t pay for our food imports.”
The point was not so much the money itself, but rather the need to get the IMF’s imprimatur on our policy. Once the IMF had given its stamp of approval other lenders were prepared to make the cash available, the pound climbed, and confidence was restored. We had a similar example of the need for some external (or at least semi-external) verification of government plans with the creation of the OBR in 2010.
Even now, Andy Burnham has had to make it clear that he would stick to OBR rules. When Liz Truss and Kwasi Kwarteng pushed aside the OBR in 2022, disaster followed. The problem now is that those OBR rules are only just credible, hence the fact that the UK has to pay a higher rate of interest to borrow than any other major economy.
I hope that the Truss/Kwarteng episode has inoculated the new lot who take over later this month against fiscal adventures. But international confidence in the UK is fragile and things could go very wrong.
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