Government debt to soar to ‘unsustainable’ levels despite Reeves’ new borrowing rules

The Government’s debt mountain is set to soar to ‘unsustainable’ levels even under the Chancellor’s new fiscal rules, official figures show.

Rachel Reeves last week binned the old method of measuring public debt, paving the way to saddle future generations with vast liabilities.

Her new rules will allow her to borrow up to £50billion more while still claiming she can balance the books.

But they also mean that, based on current estimates, almost £1 in every £3 of tax revenue will go on interest payments within 50 years – money that could have been spent on hospitals, schools and defence.  

On Wednesday Reeves will fire the starting gun on the huge borrowing binge in her maiden Budget, which will include ‘painful’ tax raids on pensions, inheritance and capital gains.

The Tories described changing the debt rules as a ‘fiddle’.

Reeves claims it will lay the ground for ‘sustainable growth’ based on ‘long-term’ investment in public services like the NHS and in key sectors such as infrastructure, green energy and life sciences to boost growth.

Net debt currently stands at £2.8trillion – roughly equal to annual economic output, or GDP – and is at highest level since the early 1960s.

Recent figures from the independent Office for Budget Responsibility watchdog show that, even under her new measure, national debt will still balloon to almost three times the size of the economy over the next 50 years.

Its Fiscal Risks and Sustainability report pointed to ‘an ageing population’.

It highlighted ‘a falling birth rate’ adding that the ‘baby-boom’ generation, born between 1945 and 1964 are retired or heading in that direction. 

This, the OBR said, means less tax is likely to come in and that there will be a greater need to spend on health, care and pension costs for a burgeoning number of elderly people.

The cost of servicing the interest on the mounting debt pile is also predicted to sky-rocket, placing a huge financial burden on our children and grandchildren.

Interest payments will account for almost a third of Government revenues by 2074, compared with 7 per cent today, according to the OBR. 

‘These and other pressures would eventually put the public finances on an unsustainable path,’ the OBR added. The forecasts are based on Reeves’ preferred debt measure of debt called public sector net financial liabilities, or PSNFL – also known as ‘sniffle’.

PSNFL is a broader measure of debt than the one currently used, meaning the ratio of borrowing is lower even if the actual amount remains the same.

The new rule treats student loans as an asset – on the basis that some of the debt eventually will be repaid – instead of counting the whole of the loan book as a liability.

The cost of government borrowing has crept up in recent weeks amid growing concerns about Reeves’ tax and spending plans.

Financial markets are braced to see how much of the extra £50billion headroom the Chancellor will use in her Budget.

Reeves says she will put in place ‘guard rails’ to reassure them – and to prevent splurging taxpayers’ cash on expensive pet projects.

The OBR’s report, which was based on the policies of the previous government, will be updated next year to take account of Reeves’ Budget plans.

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