In accordance with the Charter for Budget Responsibility, the OBR has today published its third Fiscal Risks Report (FRR). FRR 2021 provides an update on the risks identified in previous reports, alongside focussed coverage of three areas of fiscal risk: the coronavirus pandemic, climate change, and the cost of government debt. I am grateful to the Budget Responsibility Committee, and staff of the OBR, for their work in preparing this report, which ensures that the UK continues to be at the forefront of fiscal transparency and management during these unprecedented times. The report was laid before Parliament earlier today and copies are available in the Vote Office. The government will respond formally to FRR 2021 within the next year.
The UK has experienced two ‘once-in-a-generation’ economic shocks in just over a decade, and the challenges faced by the UK since the start of the pandemic have been substantial. Action taken over the last decade to restore the public finances to health enabled the government to fund a comprehensive package of support for the economy when most needed. The report notes that our direct support to businesses helped keep many of our employers afloat, kept insolvencies in check and avoided the kind of credit-crunch that occurred during the financial crisis. The government has acted on a scale unmatched in recent history to protect people’s jobs and livelihoods and to support businesses and public services across the UK. Taking into account the significant support confirmed at Spending Review 2020 and Budget 2021, total announced support for the economy in response to Covid-19 is £352 billion across 2020-21 and 2021-22.
The report highlights the range of spending choices and risks we face, particularly relating to pandemic spending. These will be considered at the Spending Review. As the report notes, spending is increasing in cash terms, real terms, and as share of GDP overall. Total managed expenditure is forecast to rise by 2.1 per cent of GDP between 2019-20 and 2024-25. Core departmental spending is set to grow at an average of over 3 per cent in real terms over this Parliament. Our plans will deliver the largest real terms increase in departmental spending for any full Parliament this century.
It is clear that unmitigated climate change is another significant fiscal risk and decarbonisation is essential for sustainable long-term growth and therefore also for the health of the public finances. The fiscal consequences of transition to net zero will need to be managed in line with the government’s broader fiscal strategy. The government will publish our Net Zero Strategy later this year, which will set out more detail on how we will meet our net zero target.
The pandemic and the government’s necessary policy response has led to an unprecedented increase in government borrowing and debt; FRR 2021 illustrates how this has made the public finances more sensitive to changes in interest rates. While borrowing costs are affordable now, interest rates and inflation may not stay low forever. The OBR’s latest forecast recognises that the government’s current fiscal plans deliver a stable medium-term outlook for public sector net debt, but as I set out at that Budget, we need to pay close attention to the affordability of that debt.
The risks discussed by the OBR in this report underline the importance of returning our public finances to a more sustainable path. The report finds that, in the face of many potential fiscal risks, “fiscal space may be the single most valuable risk management tool”. That is why the government set out at Budget 2021 a plan for returning the public finances to a more sustainable path. It is vital that we rebuild fiscal space to ensure that the government can maintain fiscal resilience to respond as future risks materialise, continue to invest in excellent public services and give businesses and citizens across the UK the certainty that comes with knowing we can and will support them.