The Chief Secretary to the Treasury (Elizabeth Truss)
The Office for Budget Responsibility (OBR) has today published its first fiscal risks report (FRR). The report highlights that although the Government have made significant progress in reducing the deficit, debt remains high leaving the economy and public finances vulnerable in the event of shocks. The FRR fulfils the OBR’s legal obligation to publish a statement setting out the main risks to the public finances at least once every two years. It was laid before Parliament earlier today and copies are available in the Vote Office and Printed Paper Office.
The Government welcome this first FRR which keeps the UK at the frontier of fiscal practice worldwide. The establishment of the OBR has ensured that policy is made on an unbiased view of future prospects, improving confidence in the fiscal forecasts, and the publication of this report represents a significant further step taken by this Government to enhance fiscal transparency and management. This Government’s commitment to fiscal openness was recognised by the IMF in its 2016 fiscal transparency evaluation which found the UK to be “at the forefront of fiscal reporting practices worldwide”. The publication of the FRR today addresses one of the recommendations of that evaluation as well as the findings of recent NAO reports on risks to the public finances. The Government will respond formally to the FRR within the next year, as required under the Charter for Budget Responsibility.
Over the past seven years, the Government have taken important steps to reduce the UK’s exposure to fiscal risks. The 2008 crisis was a dramatic illustration of the danger of ignoring potential threats to the public finances. Since 2010, the Government have reduced the country’s exposure to fiscal risks through cutting the deficit by three-quarters from its post-war high of 9.9% of GDP, while protecting public services and delivering improved outcomes across health, education and policing and overseen record levels of employment, with over 2.9 million more people into work. The Government have also delivered far reaching reforms to financial supervision which has significantly reduced the likelihood and impact of financial instability. Today, the Government are announcing a new approval regime for Government guarantees and other contingent liabilities representing a further enhancement to the UK’s public expenditure control framework which the IMF and other international commentators recognise as being one of the strongest in the world.
Despite this progress, the OBR’s report shows that the UK’s fiscal position remains vulnerable. The legacy of the great recession remains, with debt forecast to peak this year at almost 90% of GDP—its highest level in 50 years. The unprecedented deficit that the Government inherited in 2010, which the Government have been cutting since 2010, and which saw us spend £4 for every £3 we raised in tax, is the cause of the rapid increase in debt. This report examines a broad spectrum of risks, and illustrates the potential impact on the public finances of a number of these risks materialising at the same time through an innovative “fiscal stress test”. Failing to have a credible plan to get the debt down would expose the UK to greater risk, which could have devastating consequences for our public services in the event of a new shock. The report also highlights risks from an ageing society and the erosion of tax bases.
That is why the Government remain determined to learn the lessons of the past and bolster the UK’s fiscal resilience. The Government’s fiscal rules are designed to guide the public finances back to balance at a pace sensitive to the needs of the economy. The structural deficit must be below 2% of GDP and debt must be falling as a share of GDP by 2020-21. The OBR forecasts that the Government are on track to meet both of their fiscal targets and that debt will start falling as a share of GDP before the end of the decade. It is vitally important that we continue with our plan to get the debt to GDP ratio down to improve our resilience and address the risks highlighted by the report.
The Government are also working to ensure fiscal sustainability over the long term. The Government are taking important steps to enhance the UK’s long-run productivity. Since 2010 there has been over a quarter of a trillion pounds of public and private investment in infrastructure. Looking ahead, the Government are investing more in economic infrastructure, innovation and housing through the £23 billion national productivity investment fund by 2021-22. They are also transforming technical education for 16 to 19-year-olds through the introduction of T-levels, increasing by over 50% the number of hours of training, and including a high-quality three-month work placement for every student, giving young people the technical skills they need to succeed in the world of work, and businesses the edge they need to compete in the global economy. Stronger growth through raising productivity is the only sustainable way to deliver economic resilience, higher real wages and increased living standards in the long run.
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