Even that most grim statistic of all, Public Sector Net Debt, has eased down to 85.2 per cent of GDP – one percentage point lower than a year ago. Borrowing is now at the lowest level for over a decade.
Against this backcloth, who’s worried about debt? The figures are falling faster than predictions – pointing to a further relaxation in “austerity” in the budget later this year. Indeed, something of a spending bonanza may be on the cards.
But looking further ahead, a recent analysis by the Office for Budget Responsibility points to a tax and debt Armageddon. Its latest projections show that while in the short term, government debt will come down to 80 per cent by 2022-23, after that debt is forecast to exceed 100 per cent of GDP by the early 2030s and to be a massive 283 per cent of GDP by 2067-68.
It seems scarcely credible that after a prolonged period of fiscal restraint we are heading for unparalleled levels of debt. But factor in the inescapable dynamics of demographics and the soaring costs of health and welfare provision and these numbers are all too real.
Far too Malthusian, you may object. These estimates run so far into the future as to be meaningless. We cannot assume “unchanged policies” over such a long period, or that technological change would not fundamentally change our economy and our way of life for the better. Thomas Malthus predicted in 1798 that the growth in population would far outstrip our ability to grow food, with resulting mass famine. It seemed plausible at the time. But it proved nonsense.
So need we worry? Yes – and the government’s fiscal problems may be closer at hand than we are led to believe.
First, the near term outlook. It may seem that debt can be constrained by tax increases – and the government has already signalled that tax rises may be on the way to help fund the relentless rise in healthcare provision.
This year the government will raise £776bn in total, equivalent to some £28,000 per household. These receipts – including dividend income and interest receipts, so not totally derived from tax – will partly finance its £813bn of spending, leaving a deficit of £37.1bn, or 1.8 per cent of GDP – the lowest since 2001-02, so surely no cause for concern.
But some £28bn has already been raised in new taxes since the credit crunch. And the government is under pressure to raise taxes to fund the NHS, with a hypothecated health tax said to be under consideration. There are also persistent calls for higher spending on defence and education.
According to research from the Taxpayers’ Alliance last week, the UK tax burden is already at a 49-year high. This year, taxes will account for 34.3 per cent of GDP, the highest since 1969-70.
This analysis follows previous research by the TPA which found that the bottom 10 per cent of earners in Britain pay 49.5 per cent of their income in tax.
Possible new tax options include a tax on chocolate, an end to the fuel duty freeze, higher inheritance tax, council tax and business rates and an increase in income tax and national insurance to fund social care.
None of these are palatable. Higher tax seldom is. But these may be gentle steps on the southern slopes of tax compared with what may be in store.
According to the OBR’s fiscal sustainability report – lost from view amid the relentless daily crisis of Brexit – the public finances present a far greater problem for the government and the country. Its latest “baseline” projections show debt will exceed 100 per cent of GDP by the early 2030s and to be a massive 282.8 per cent of GDP by 2067-68. (Don’t we just love that decimal point? How can projections 50 years ahead be so finely calculated?)
The big picture is that public sector debt in today’s prices would hit nearly £6 trillion, or more than £90,000 per head. By way of historical comparison, the all-time high for debt to GDP was in the immediate aftermath of the Second World War when it reached 252 per cent of GDP in 1946-47. But back then, as the Sunday Times’ David Smith points out, there was a clear route to running down the debt as war expenditure fell dramatically. This time around the debt would still be on a rising trend.
Why? How? By 2067, some seven per cent of the population will be 85-plus, compared with two per cent now. And 27 per cent will be 65-plus, against 18 per cent now. The OBR also assumes that NHS spending will continue to rise to accommodate demographic and other cost pressures. And it assumes there would be no Brexit dividend to help fund this.
Even if we allowed debt to rip, how could we afford the interest payments? Debt interest already, even at low interest rates, now costs more than the government spends on the police and the armed services. It is equivalent to the fourth largest spending department in Whitehall, after health, welfare and education.
So, a tax hammering ahead? It would be wrong to assume that the only way to raise more revenue would be to increase taxation. Reducing tax rates can bring in more revenue. For example, corporation tax receipts have risen 25 per cent in real terms after headline rates came down from 28 per cent in 2010-11 to 19 per cent in 2017-18. And income tax receipts from the additional rate rose by 37 per cent in real terms after the rate came down from 50 per cent in 2010-11 to 45 per cent in 2013-14 (Scottish Government, please note).
But tax hikes and new charges – a fee for GP visits, for example – there will certainly be. However, looking further ahead what will be needed is not so much tax fine tuning but little short of a financial miracle.