The OECD has warned that the UK must take significant action to stabilise its public finances. The warning comes ahead of the Chancellor’s upcoming budget announcement.
Facing rising health, pension, and climate change costs, the OECD has called for an overhaul of the UK’s fiscal regime. Key recommendations include scrapping stamp duty and modifying the pension triple lock.
OECD’s Dire Warning
The OECD has issued a stark warning that the UK must undertake significant fiscal reforms to stabilise its public finances. This announcement comes as the country grapples with mounting spending pressures driven by rising health, pension, and climate change costs.
Mounting Fiscal Pressures
The OECD highlighted that these challenges are compounded by the UK’s existing fiscal difficulties, which include high debt levels, rising interest payments, and sluggish economic growth. These factors have significantly contributed to increasing borrowing costs over time.
Current Debt Trajectory
Recent forecasts by the Office for Budget Responsibility indicate that the UK’s debt could reach 270% of GDP within 50 years due to escalating healthcare and pension expenditures.
This alarming projection underscores the urgency for the government to address fiscal imbalances and implement sustainable economic policies.
The OECD’s report has echoed this sentiment, adding that ‘significant action is needed to stabilise public debt over the longer term’. The organisation calls for reforms to ensure a fairer and more efficient tax system.
Reform Recommendations
Among the key recommendations is the proposal to scale back the costly pension triple lock. The OECD suggests that pension entitlements should rise in line with an average of inflation and wage growth, rather than the current system where pensions increase by the highest of 2.5%, inflation, or pay growth.
The International Monetary Fund has similarly recommended curbing the generosity of the triple lock to help contain costs.
Tax System Overhaul
The OECD’s report advocates for scrapping stamp duty, a tax on property sales, arguing that it hinders labour mobility and disrupts the housing market.
Additionally, the report advises unfreezing fuel duty, simplifying the income tax system, and limiting the amount of interest expenses that companies can deduct from their taxes.
Updating property valuations used for council tax determinations, which in England are still based on 1991 values, is also suggested.
Public Investment
The OECD emphasises the need to increase public investment, which may require adjustments to the current fiscal rules. Public investment is currently treated the same as current spending, often resulting in insufficient funding for productivity-enhancing projects due to budget constraints.
The report argues for a reallocation of resources to boost public investment, thereby enhancing the UK’s long-term growth prospects.
This reallocation could lead to more sustainable economic developments and improved public services.
Energy Price Surge
The UK’s debt has surged from around 35% of GDP sixteen years ago to nearly 100% today, driven by a series of economic shocks such as the 2008 financial crisis, the pandemic, and the recent energy price surge.
Economists warn that debt becomes unsustainable when interest payments outpace economic growth—a scenario currently affecting the UK and other developed economies.
Over the next five years, approximately 9% of every £1 spent by the UK government will go toward debt interest costs.
Political Response
During the recent general election campaign, the IMF urged both Labour and Conservative parties to avoid making promises of deep tax cuts that could undermine fiscal credibility.
In response to the growing fiscal challenges, the Treasury has stated, ‘Following the spending audit, the chancellor has been clear that difficult decisions lie ahead on spending, welfare, and tax to fix the foundations of our economy.’
As the budget date approaches, pressure is mounting on the government to implement the necessary fiscal reforms to stabilise the UK’s finances.
The OECD’s recommendations highlight the need for a balanced approach to revenue generation and public spending to ensure long-term economic stability.
