The Organisation for Economic Co-operation and Development (OECD) has issued a grave warning to the United Kingdom, urging substantial reforms to stabilise its public finances. This comes amid rising health, pension, and climate change costs, which are exerting unprecedented pressures on government spending.
The OECD’s latest report emphasises the immediate necessity for a comprehensive overhaul of the UK’s fiscal regime. It recommends scrapping stamp duty and scaling back the costly pension triple lock as pivotal steps. According to the report, these measures are imperative as the UK grapples with high debt levels, increasing interest payments, and sluggish economic growth. These financial strains contribute to escalating borrowing costs over time.
Adding to the urgency, the Office for Budget Responsibility recently indicated that UK debt could soar to 270% of GDP within the next half-century, mainly driven by escalating healthcare and pension expenditures. This dire projection has intensified calls for action ahead of the upcoming budget, where approximately £22 billion of government overspending is expected to be addressed, potentially through tax hikes.
The OECD suggests modifying the pension triple lock system to tie pension entitlements to an average of inflation and wage growth, rather than the highest of 2.5%, inflation, or pay growth. The International Monetary Fund has echoed this sentiment, recommending measures to contain the growing costs of pensions. The OECD has reiterated that significant action is needed to stabilise public debt in the long term, advocating for a fairer, more efficient tax system.
The report also calls for increased public investment, which may necessitate adjustments to existing fiscal rules. Currently, public investment is treated the same as current spending, often resulting in insufficient funding for productivity-enhancing projects. The OECD argues for a reallocation of resources to boost public investment, thereby enhancing the country’s long-term growth prospects.
Abolishing stamp duty is among the key recommendations, aimed at removing barriers that hinder people from moving to pursue better job opportunities or downsizing in retirement. The OECD argues that this tax 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 for council tax, which are still based on 1991 values, is also recommended.
UK debt has dramatically increased from about 35% of GDP sixteen years ago to nearly 100% today, driven by multiple economic shocks, including the 2008 financial crisis, the pandemic, and the recent energy price surge. While no specific debt level automatically triggers a financial crisis, 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 pound spent by the UK government will go toward debt interest costs. During the recent general election campaign, the International Monetary Fund urged major political parties to avoid making deep tax cut promises that could undermine fiscal credibility.
The Treasury has responded to these fiscal challenges by stating that difficult decisions lie ahead regarding spending, welfare, and tax to address the £22 billion hole in government finances. The upcoming budget is expected to feature critical decisions aimed at fixing the foundations of the UK economy.
As the budget date approaches, the pressure intensifies on the UK government to implement necessary fiscal reforms. Balancing the need for revenue with sustainable public spending and investment will be crucial in stabilising the nation’s finances.
