The Office for Budget Responsibility’s (OBR) Fiscal Risks and Sustainability Report (FRS) [CP 870] has been laid today. It examines three main risks to the public finances through chapters on Inactivity and Health, Energy and Debt Sustainability, as well as providing an update on the other risks in its fiscal risks register. This fulfils the OBR’s obligation to examine and report on the sustainability of, and risks to, the public finances as laid out in the Charter for Budget Responsibility. I would like to thank the OBR’s staff and the Budget Responsibility Committee for their efforts in producing this report.
As the OBR highlights in its report, the UK has, in common with other countries around the world, experienced a ‘rapid succession of shocks’ in recent years. Putin’s illegal war in Ukraine has contributed to a surge in energy prices, driving higher inflation across the world. Central banks are raising interest rates to get global inflation under control, which has pushed up the cost of borrowing for families, businesses and governments. The government has acted to support households and businesses through these shocks, including most recently through energy support schemes and targeted cost of living support, while taking fiscally responsible decisions that ensure the public finances are on a sustainable footing and avoiding adding to inflationary pressure.
The FRS highlights the importance of tackling economic inactivity, as helping more people into work also reduces pressure on the public finances. The government has already started to take action to address the rise in inactivity, including through the labour supply package announced at Spring Budget 2023, which includes the new 30 hours a week of free childcare for working parents of nine-month- to two-year-olds and a new disability employment programme. The OBR forecasts that this package will increase employment by 0.3% by 2027-28, with an overall impact on GDP of around 0.2% in the same year. This is the largest upward revision the OBR has made to potential output within its forecast as a result of fiscal policy decisions since its creation in 2010. In June, the NHS in England published the first ever Long Term Workforce Plan, which was developed by the NHS and backed by the government. It sets out a path to put staffing on a sustainable footing and improve patient care and the government is backing this plan with more than £2.4 billion funding over the next five years to deliver this planned transformation in NHS training and recruitment.
While energy prices have fallen back recently, they remain above pre-pandemic levels following Russia’s invasion of Ukraine. In response, the government is providing £94 billion of cost of living support, including direct help for energy bills across 2022-23 and 2023-24. Indeed, the OBR acknowledges in the FRS that the ‘level of fiscal support with energy costs provided in the UK has been among the most generous in Europe’. To increase the UK’s resilience to future energy price shocks, the government is committed to transitioning to clean energy sources and is working to deliver tangible progress while bringing down energy bills. Between 1990 and 2021, the UK has cut emissions by 48% whilst growing the economy, decarbonising faster than any other country in the G7. The government committed £30 billion of domestic public investment for the green industrial revolution at Spending Review 2021, as well as £6 billion for energy efficiency at Autumn Statement 2022 for the next Spending Review, and up to £20 billion for Carbon Capture Usage and Storage announced at Spring Budget 2023. Over 80,000 green jobs across the UK economy are currently being supported or are in the pipeline as a result of new government policies and spending since November 2020. What really matters is not just public investment, but total public and private investment. Since 2010, public and private investment alongside consumer levies has seen investment of £198 billion in our green industries. The government has set out detail on the policies and programmes to reach net zero, including via the Net Zero Strategy 2021, the Net Zero Growth Plan 2023, and specific sectoral strategies.
In common with many advanced economies, the UK’s level of debt remains elevated following recent global shocks, including the pandemic and energy prices. As the OBR highlights, government spending on servicing this elevated level of debt is rising due to higher inflation and rising borrowing costs. The OBR notes that higher inflation will not erode the real value, or ‘inflate away’, debt. This highlights why it is important to deliver on the Prime Minister’s priority to get debt falling and to control borrowing to avoid adding inflationary pressures and risk prolonging higher inflation. That means taking difficult but responsible decisions on the public finances, including public sector pay, because more borrowing is itself inflationary.
While the start of this century has seen an increased frequency of global shocks as outlined above, there are also a wider set of risks to the public finances that the government needs to remain mindful of, which the OBR outlines in its fiscal risks register. The government will respond to the FRS at a subsequent fiscal event, to provide an update on the actions being taken to mitigate the risks identified by the OBR.