The Organisation for Economic Co-operation and Development (OECD) has issued a stark warning regarding the UK’s public finances, calling for substantial reforms to address mounting fiscal pressures. In its latest report, the OECD highlights the urgent need for policy changes, including scrapping stamp duty and adjusting the pension triple lock, to mitigate the rising costs driven by health, pension, and climate change expenditures.
The OECD, representing 38 advanced economies, raised concerns about the UK’s high debt levels, increasing interest payments, and sluggish economic growth, which collectively exacerbate borrowing costs over time. The warning follows a forecast by the Office for Budget Responsibility, predicting that debt could soar to 270% of GDP within 50 years due to escalating healthcare and pension expenses.
In anticipation of the upcoming budget on October 30, Reeves is expected to address approximately £22 billion of government overspending, with potential tax hikes under consideration. The OECD’s report underscores the necessity of scaling back the costly pension triple lock, suggesting that pension entitlements should rise in line with an average of inflation and wage growth rather than the current system. The International Monetary Fund has echoed this recommendation, advocating for a reduction in the generosity of the triple lock to manage costs effectively.
The OECD emphasised the urgent need for significant action to stabilise public debt over the long term, advocating for a fairer and more efficient tax system. Additionally, the report recommended increasing public investment, which may necessitate adjustments to fiscal rules. Presently, public investment is treated similarly to current spending, often resulting in insufficient funding for productivity-enhancing projects due to budget constraints. The OECD argues for a reallocation of resources to boost public investment, thereby enhancing the country’s long-term growth prospects.
Among its pivotal recommendations, the OECD suggested abolishing stamp duty on property sales, as it hinders labour mobility by discouraging people from moving for better job opportunities or downsizing in retirement. The report also advised 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 to determine council tax, which in England are still based on 1991 values, was also proposed.
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, including the 2008 financial crisis, the pandemic, and the recent energy price surge. Although 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 be allocated to debt interest costs.
During the recent general election campaign, the IMF urged both Labour and Conservative parties to avoid promises of deep tax cuts that could undermine fiscal credibility. In response to the growing fiscal challenges, the Treasury 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 and address the £22 billion hole the government has inherited. Decisions on how to do that will be taken at the budget.”
As the budget date approaches, the pressure mounts on the government to implement necessary fiscal reforms to stabilise the UK’s finances. Balancing the need for revenue with sustainable public spending and investment is imperative for long-term economic stability.
