The Office for Budget Responsibility (OBR) has published a new report, ‘Fiscal risks and sustainability’ which highlights current and potential pressures on the UK public finances, including how this may affect taxes.

This new annual report replaces the previously separate 'Fiscal sustainability' and 'Fiscal risks' reports. It looks in some great detail at the impact on the UK public finances of heightened geopolitical tensions, such as the war in Ukraine, breakdown of multilateral trade negotiations and the US-China tariff war, as well as higher energy prices, and demographic change.

The report highlights two key areas of fiscal risk which are:

  • Loss of motoring tax revenues alongside the transition to net-zero carbon emissions.
    • This is the first time the OBR has factored in the loss of taxes associated with the planned shift to electric vehicles and move to net-zero by 2050.
    • It anticipates a reduction in revenue of 1.6% of Gross Domestic Product (GDP) per year from 2050-51, which in current terms is around £40 billion per year (assuming current GDP is c£2,500 billion).
  • Demographic change and long-term policy changes such as:
    • An ageing population. This has been offset somewhat since 2018 by lower birth rates which have reduced spending on health, education and child-related welfare, but this will be overtaken in the long run by the increasing costs of health, social care and pensions for the elderly as well as the cost of a reduction in the working population due to decreasing net migration.
    • Adult social care reforms will raise primary spending levels by 0.4% of GDP or £10 billion (based on current GDP levels) over the next ten years.

The report notes that the Government has so far spent as much this year (1.25% of GDP) to help households cope with the cost of living crisis as it did to support the economy through the financial crisis.

Long-term projections show public debt rising to over 100% of GDP by 2052-53 and 267% by 2072, unless changes to health, social care and pensions spending plans are revised and assuming a 100% drop in motoring taxes by 2050.

Prior to the pandemic in March 2020 debt was 75% of GDP and to return to this level the OBR estimates that an additional 1.5% of GDP, or £37 billion a year (in today’s terms) would need to be found at the start of each decade for the next fifty years. This means either taxes must rise, spending must fall, or more likely a combination of both.

Comment

It would seem that there will need to be a replacement for road tax and fuel duty once we are all driving electric vehicles and perhaps some of the current candidates for Prime Minister should read this report before they continue to base their campaigns on introducing immediate tax cuts!

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External link

OBR report: ‘Fiscal risks and sustainability’ July 2022 


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