The incoming prime minister will inherit borrowing running a fifth above forecast and official projections showing the public finances on an unsustainable long-term path — prompting stark warnings from economists and his own chancellor-in-waiting era predecessor.
Andy Burnham will walk into Downing Street this month facing public finances in significantly worse shape than planned, with borrowing already a fifth higher this financial year than the Office for Budget Responsibility had projected and the watchdog warning that the country’s long-term fiscal position is unsustainable.
Burnham, who secured the backing of 322 of Labour’s 403 MPs, is expected to become the party’s leader on 17 July and prime minister on 20 July. Rachel Reeves has publicly cautioned him to expect immediate “shocks and challenges” on entering No 10, saying he needs to arrive with a developed plan.
The scale of the immediate problem was underlined by the latest official figures, which showed public-sector borrowing hit £23.3billion in May — £5.6billion above the OBR’s forecast and 30.4 per cent higher than the same month last year. The next set of public-finance figures is due on 21 July, the day after Burnham is expected to take office. Unless the picture improves, he and his chancellor would need to cut spending and raise taxes at the autumn Budget simply to return to the path Reeves set out.
The longer-term outlook set out in the OBR’s report on Fiscal Risks and Sustainability is more daunting still. The watchdog projects that, on its baseline, debt enters a “steep upward trajectory” in the 2040s — with plausible alternative scenarios bringing that turning point forward — and says that while its 50-year projections are highly uncertain, almost all scenarios ultimately leave the public finances on an unsustainable path.
Demographics are central to that assessment. With fewer working-age people supporting a growing elderly population, state pension spending is projected to rise from around 5 per cent of GDP today to roughly 9 per cent by the 2070s if the triple lock is retained; moving to earnings-linked increases could save as much as 2 per cent of GDP over the long run, though Burnham has said he will not scrap the policy. Healthcare spending is projected to climb from about 8 per cent of GDP to 13 per cent by 2075 unless NHS productivity improves, while meeting the Government’s 3.5 per cent-of-GDP defence target is estimated to require an extra £28billion a year. Tax revenues, by contrast, are expected to stay at around 41 per cent of GDP, and the OBR has cautioned against assuming tax rises alone can close the gap, since the economic distortions caused by taxation grow more severe as rates increase. The watchdog also identifies weak productivity as a key risk alongside demographics, noting that stronger growth could materially improve the debt trajectory — and that the fiscal effects of artificial intelligence are unusually uncertain, with the potential to lift productivity and wages but also to erode tax receipts through worker displacement.
Writing in the Daily Mail, the economics commentator Hamish McRae argued the OBR’s message confronts Burnham with a reality for which he is unprepared, suspecting the incoming prime minister has “zero idea of what will hit him.” McRae contends the Government cannot borrow its way out — on the OBR’s numbers, attempting to do so would see the national debt triple to 300 per cent of GDP, above its level at the end of the Second World War — leaving some combination of higher taxes and lower spending as the only option, and the sooner it begins, the less severe the adjustment. He assesses the commonly floated remedies as inadequate: even switching the pension triple lock to an earnings link would leave costs rising, while charging capital gains tax on main homes would raise too little and clog the property market. Restoring a basic rate of income tax in the 40 to 50 per cent range, as applied from 1945 to 1971, would close the gap, he writes, but would fall hard on the young and prove politically fatal. McRae predicts tax rises will come but will not cover future burdens, and warns a financial crisis in the next two or three years could force an emergency budget of deep cuts — possibly bringing down the Burnham government.
More broadly, McRae argues Britain is already shifting towards greater self-reliance, citing figures showing roughly 20 per cent of healthcare is now privately funded, up from 17 per cent 15 years ago; pension scheme membership among private sector workers has doubled from 42 per cent to 86 per cent since auto-enrolment began in 2012; more than half of care home funding now comes from individuals and families; and the Bank of Mum and Dad now helps half of all first-time buyers, with parents and grandparents increasingly covering university fees as well.
Burnham has indicated he will keep the existing fiscal rules but is weighing new taxes focused on property wealth. His wider agenda — including council tax reform, mass council-house construction and welfare changes aimed at rising disability-benefit costs — is likely to sit at the heart of the autumn’s fiscal debate.
