Re:View 11 July 2025
Directory of Strategy
Quote of the week
“Over the long term, the demographic pressures of an ageing population and rising costs of healthcare and other age-related expenditures are still, on current policy settings, projected to push borrowing above 20 per cent and debt above 270 per cent of GDP by the early 2070s”
The Office for Budget Responsibility, Fiscal risks and sustainability, 8 July 2025
Things are heating up in Westminster, and I’m not just talking about the weather.
Following the Government’s concessions on welfare reform, the pressure on the public finances ahead of the autumn is higher than ever, with the implication that more tax rises are likely. And the mood music from Downing Street is that there can’t be any more giveaways, with MPs being told that other items on their wish list, like removing the two-child benefit cap, are now unaffordable. Adding fuel to the fire, the latest ONS stats show that the economy shrank in May, particularly in construction and production.
But if you thought things were already bad, it’s helpful to have the OBR’s Fiscal risks and sustainability report, published this week, remind us of how much worse it could get. Because these short-term challenges are part of much bigger trends. It’s essential to take the long view, here are three things which jumped out to me.
Shocks
Big fiscal shocks from the 2008 financial crisis and the Covid-19 pandemic have eroded our capacity to respond to future shocks, and budget plans haven’t adjusted to this. Underlying public debt is now at the highest point since the early 1960s, and is projected to keep rising. Borrowing costs are rising around the world, and there seems less appetite to lend to the government than previously. This erodes our ability to borrow more if new shocks happen, as they inevitably will.
Pensions
The triple lock will cost three times more than initially expected when introduced in 2012. By 2029-30 it will cost about £15.5 billion more than an earnings-linked (‘double lock’) alternative – about as much as the whole of core police funding in England and Wales. It is unsustainable – based on the OBR’s central estimate, state pensions will cost over 7.5 per cent of GDP by the 2070s, up from 4.5 per cent today
Uncertainty
Government doesn’t exist in a vacuum, it must respond to events outside its control. Trade negotiations with the US create huge uncertainty for the UK economy, with the OBR highlighting that if the US ‘Liberation Day’ tariffs are fully imposed it could add over £10 billion of extra pressure to the public finances – the same size as the vanishingly-small headroom the Chancellor gave herself in March.
The growing size of the welfare state might seem like a political inevitability right now, but the political consequences of the long-term trends are becoming more and more real. Political leaders need the courage to face up to these trends, and chart a different course before it’s too late.
Read of the week
Catch my co-Policy Director Simon Kaye on the Radical Reformers podcast talking about our paper Trusting Place, out this week.