OBR warns MPs against loose fiscal policy

As the Tory leadership contest saw contenders set out their plans for taxes and government spending, officials from the UK’s fiscal watchdog yesterday repeated warnings about the trajectory of the UK’s public finances.  

In a Treasury Select Committee hearing yesterday, Chair of the Office for Budget Responsibility Richard Hughes said that the UK’s debt is set to rise from under 100 per cent of GDP currently to over 250 per cent of GDP by the 2070s, warning that the nation’s finances are on an unsustainable trajectory. 

While there had been a number of fiscal shocks to the economy, such as the Covid pandemic, and the Russia-Ukraine war, Hughes said the government needs to look at underlying trends, such as the UK’s declining birth rate, that will impact the county’s finances in the future. 

“If we want to avoid that unsustainable position in 50 years we need to get ahead of these long term trends that are eroding the tax base or adding to cost pressures on public services and being alive to the risks along the way,” Hughes said.

Hughes said that the government would take a hit from reduced tax collection after banning new fossil fuel cars by the mid 2030s. The government currently collects around £30bn through motoring taxes, petrol duty and vehicle excise duty, and will lose about 1.5 per cent of the country’s GDP in tax revenue once this is gone. 

Tighter fiscal policy would be required , Hughes said, with a loose fiscal policy being potentially detrimental. 

“To maintain fiscal sustainability, either other parts of the public spending system would need to be cut back or taxes would need to rise,” Andy King, a senior OBR official, told MPs yesterday.