Key facts
- The UK's public finances are in an 'unsustainable position in the long run', according to the OBR.
- The government deficit was 5.7% of GDP at the end of 2024, ranking fifth among 36 advanced economies.
- UK government debt stands at 94% of GDP, the sixth highest among advanced economies.
- The state pension triple lock is a significant driver of projected future expenditure increases.
- Reduced demand for UK government gilts from pension schemes could increase borrowing costs.
The UK's public finances are in a precarious and unsustainable long-term state, facing a multitude of unaffordable promises, according to a stark warning from the Office for Budget Responsibility (OBR). The OBR's July 2025 Fiscal risks and sustainability report highlights significant challenges including rising debt, an aging population, and the escalating costs associated with transitioning to a net zero economy.
At the close of 2024, the UK's government deficit stood at 5.7% of GDP, positioning it as the fifth-highest among 36 advanced economies and approximately 4 percentage points above the average. Furthermore, UK government debt has reached 94% of GDP, ranking it sixth highest among its advanced economy peers. Compounding these issues, the UK government faces the third-highest borrowing costs among advanced nations, after New Zealand and Iceland, underscoring its increasing vulnerability.
Successive governments have made limited progress in stabilizing public finances, with public sector net borrowing consistently hovering around 5% of GDP for the past four financial years. Over the last 15 years, underlying public debt has surged by 24% of GDP, and by 60% over the past two decades, illustrating a persistent trend of debt rising beyond previous forecasts. This erosion of fiscal capacity diminishes the UK's ability to withstand future economic shocks.
A major long-term fiscal pressure identified is the state pension triple lock, which guarantees annual increases based on the highest of earnings growth, inflation, or 2.5%. The OBR projects the cost of this mechanism could rise from an estimated £5.2 billion annually by the end of the decade to £15.5 billion a year by the next election, potentially reaching £43 billion annually by the early 2070s under certain economic scenarios.
An indirect fiscal risk stems from the shift from Defined Benefit to Defined Contribution private pension schemes. As Defined Benefit schemes, historically large holders of UK government debt (gilts), wind down, pension schemes are expected to purchase a substantially smaller share of gilts. The OBR projects a potential fall of 18.6 percentage points in pension scheme gilt holdings as a share of GDP by the early 2070s. This reduced demand could increase government debt interest rates by approximately 0.8 percentage points, potentially raising debt interest spending by £22 billion annually in today's terms, assuming debt remains at 100% of GDP.