Sustainable public finances provide the stability and confidence that underpin the economy, supporting businesses and households across the country. By taking the responsible decisions needed to achieve fiscal sustainability, the government is providing the necessary conditions for economic growth. The UK economy has been hit by significant global shocks. Putin’s weaponisation of gas supplies to Europe pushed prices to record levels, contributing to high inflation and leading the Office for Budget Responsibility (OBR) to forecast a recession that started in Q3 2022.[footnote 1] This comes at a time when the economy is recovering from the COVID-19 pandemic. During a period of significant global economic challenges, the UK economy continues to benefit from the underlying strength of its macroeconomic framework. As set out in Chapter 4, the government has affirmed the remit of the Monetary Policy Committee (MPC) of the Bank of England, which is taking action to get inflation under control. The forecasts produced by the OBR support transparency, accountability and credibility. The UK’s economic and fiscal outlook has deteriorated materially since March 2022. Higher inflation and interest rates, coupled with slower economic growth, have hit the public finances. Difficult decisions are necessary to put the public finances back on to a sustainable footing in the medium term. This is the case across both taxation and public spending, and the government is adopting a balanced approach. Given the scale of the challenge, it is inevitable that everyone will need to play a part in restoring the public finances. In taking these decisions at the Autumn Statement, the government has ensured that the greatest burden falls on those with the broadest shoulders, while supporting vital public services and protecting the most vulnerable in our society. As a result, the OBR forecasts that underlying debt (public sector net debt excluding the Bank of England) will be falling as a share of the economy in 2027-28.[footnote 2] Fiscal sustainability Sustainable public finances are a pre-requisite for macroeconomic stability and growth. Unsustainable public finances would lead to higher borrowing costs and dampen economic growth over the long term. If the public finances are on an unsustainable trajectory, larger reductions in public spending or a higher tax burden may be required to repair them. A key measure of fiscal sustainability is the trajectory of public debt as a share of GDP. Before accounting for the effect of the measures taken at the Autumn Statement, underlying debt would have been rising by 1.0% of GDP in 2027-28.[footnote 3] Ensuring that debt as a share of GDP falls over time allows the government to fund high quality public services while preserving its ability to support households and businesses in the face of economic shocks. Debts cannot continue to grow forever – at some point lenders become concerned that they will not be repaid and choose to lend their money elsewhere. That is why the government is reaffirming its commitment to ensuring debt falls over the medium term. Several other countries have also reaffirmed their commitment to return to fiscal discipline in the medium term, including reducing debt as a share of GDP. In the face of regular, significant shocks and long-term pressures, keeping the debt trajectory under control requires debt to fall as a share of GDP in normal times. The OBR stated that, on average, the UK economy has been hit by a fiscal shock such as a recession every nine years, and a typical recession could add an average of 10 percentage points to the debt-to-GDP ratio.[footnote 4] In addition, long-term structural changes, such as an ageing population, pose challenges to the public finances that will materialise over the coming decades. Reducing debt as a share of GDP will also help to reduce spending on debt interest, which could otherwise be spent on public services. Higher inflation and rising borrowing costs have increased the amount the government is spending servicing its debt. The OBR expects spending on debt interest to reach £120.4 billion this year, the highest since the late 1940s, both as a share of GDP and as a share of revenue. If debt interest spending were a government department, its departmental budget would be second only to the Department for Health and Social Care. As set out in Chart 1.1, this year the government is expected to spend more than 11% of its revenue on debt interest, the highest level since the 1960s. Compared to March, debt interest spending remains elevated over the medium term. The debt interest to revenue ratio reaches 7.6% in 2026-27, compared to 3.3% as forecast in March for the same year.[footnote 5] The UK’s public finances are exposed to changes in inflation and interest rates, as shown in Chart 1.2. The OBR estimates that the impact of a one percentage point rise in short rates would increase debt interest spending by £7.9 billion in 2026-27.[footnote 6] A higher stock of debt means that the sensitivity to gilt rates has also risen. A one percentage point increase in gilt rates could raise debt interest spending by £9.5 billion in 2026-27, compared to £6.0 billion in March 2022. Similarly, a £10.0 billion annual increase in the government’s cash requirement could mean debt interest spending rises by £1.6 billion by the end of the forecast.[footnote 7] The cost of government borrowing has been rising over the course of 2022 in all major advanced economies. The relatively similar increases in 10-year sovereign bond yields over the year-to-date in G7 economies (except for Japan) is consistent with these moves reflecting largely common factors.[footnote 8] There was significant repricing in UK government debt during late September. This volatility exposed vulnerabilities in a specific segment of the financial sector, leading to a risk of further dysfunction in the gilt market. In line with its statutory financial stability objective, the Bank of England acted to restore orderly market conditions through the temporary and targeted purchase of long-dated and index-linked UK government bonds. UK yields have fallen since the peaks in late September. The Chancellor of the Exchequer welcomed this action in his annual remit and recommendations letter to the Bank of England’s Financial Policy Committee (FPC) and reaffirmed the importance of the FPC’s primary objective of promoting UK financial stability. The letter set out that, while it might not be reasonable to expect market participants to insure against all market outcomes, it is important that lessons are learned from the recent dysfunction in the gilt market and the vulnerabilities this exposed. Chart 1.1: Debt interest to revenue ratio with illustrative interest rate and retail price index shocks Note: Debt interest to revenue ratio uses net debt interest, calculated as public sector interest paid less property income receivable, which is also deducted from revenue. The shocks are modelled using OBR’s debt interest ready reckoner. For illustrative rate and RPI shocks all increases are assumed to take effect at the beginning of 2022-23 and continue throughout the forecast. Source: Office for National Statistics, Office for Budget Responsibility and HM Treasury calculations. Public Sector (excluding the Public Sector Banks) interest & dividends paid to the private sector and the rest of the world. ONS code JW2P. Public Sector (excluding the Public Sector Banks) Current Receipts. ONS code JW2O. Public Sector (excluding the Public Sector Banks) interest & dividends received from the private sector, the rest of the world and Public Sector Banks. ONS codes JW2L and JW2M. Chart 1.2: Debt interest sensitivities in the final year of the forecast, by forecast event Source: Office for Budget Responsibility. Responsible fiscal strategy The government is demonstrating fiscal discipline in the near term which will support the Bank of England in bringing inflation down. This is carefully balanced against the need to support vulnerable households and businesses with their energy bills, and to protect public services. The Energy Price Guarantee lowers the peak of inflation and provides significant support to households this year. As noted by the OBR, the net effect of the government’s package supports the economy in the aggregate by “reducing the fall in output when the economy is in recession and unemployment rising”.[footnote 9] Over the forecast, consolidation brings borrowing down and supports the Bank of England in their fight against inflation by ensuring that excessive borrowing does not add to inflationary pressures and push up interest rates further. Box 1A sets out the government’s overall fiscal stance which shows that while policy is supportive compared to the OBR’s March forecast, decisions at the Autumn Statement ensure fiscal and monetary policy are aligned. Taken together with the tax reversals announced since the Growth Plan, decisions at the Autumn Statement ensure debt as a share of GDP is on a sustainable path. The Autumn Statement delivers a consolidation of £55 billion in 2027-28. Decisions to repair the public finances are broadly balanced across tax and spend by the end of the forecast. Autumn Statement policy decisions begin to reduce borrowing from 2024-25, when the economy is in recovery and unemployment begins to fall.
Box 1.A: The stance of fiscal policy
Faced with a recession driven by high inflation, it is necessary for fiscal policy to work alongside monetary policy while providing targeted support to households. Untargeted fiscal support would mean the Bank of England need to raise interest rates further in order to bring inflation under control. The fiscal stance measures how fiscal policy is supporting the economy and it can be viewed through the primary deficit, which captures a broad set of factors that affect borrowing (excluding debt servicing costs which typically do not stimulate economic activity).
Chart 1.3 shows that in 2022-23 and 2023-24 fiscal policy has become more supportive compared to March 2022 by 1.6% GDP in 2022-23 and 1.6% GDP in 2023-24. This increase in the primary deficit is primarily driven by energy support, which the OBR expects will also lower the peak of inflation, as well as spending on targeted welfare support. The year-on-year change in the primary deficit is negative, supporting monetary policy in bringing inflation back to target. It is possible to show a ‘cyclically-adjusted’ measure of the primary deficit but issues around how high inflation affects the fiscal position present challenges in illustrating the fiscal stance this way.
Chart 1.3: Primary Deficit (% of GDP) with changes since March decomposed Note: The final year of the March OBR forecast was 2026-2027. Therefore there are no changes shown for 2027-28. Source: Office for Budget Responsibility and HM Treasury calculations.
Table 1.1 shows that near-term policy decisions are more supportive than in March 2022, taking account of energy and cost of living support, but then broadly neutral in 2024-25, with a material tightening from 2025-26. Overall, this leaves policy providing targeted near-term support, before a medium-term consolidation to ensure sustainable public finances.
Table 1.1: Total policy decisions 2022-23 to 2027-28
£bn2022-232023-242024-252025-262026-272027-28 Total policy since March 2022-64.2-39.8+0.6+14.9+26.5+39.4 New policy at Autumn Statement (excluding energy and cost of living support)+1.3-2.0+10.0+25.7+41.4+54.9 New policy at Autumn Statement (including energy and cost of living support)(1)-41.9-27.1+9.8+25.5+41.2+54.7
1 Please refer to Table 5.1 for more detailed breakdowns Note: negative numbers represent net support to the economy Source: HM Treasury
Fiscal rules The government’s commitment to responsible management of the public finances is codified in new fiscal rules published in the Autumn Statement. The rules ensure that policy puts the public finances on a sustainable path, requiring that debt falls as a share of the economy over the forecast, while providing space for the economy to recover. Fiscal rules impose constraints to ensure governments pursue sustainable fiscal policies and help to anchor market expectations. In general, the UK’s fiscal rules are designed to guide policy decisions for the length of a Parliament, balancing stability with fiscal policy that reflects the current macroeconomic context and the government’s objectives. The UK is facing profound global challenges, meaning the context has already shifted significantly since the fiscal rules were last set at Autumn Budget 2021. While the principles behind the government’s previous fiscal rules remain, applying them rigidly now would require at least an additional £11.4 billion of spending cuts or higher taxes at this event,[footnote 10] on top of the difficult, but necessary, decisions already taken. Countries around the world are balancing the need to respond to cost of living pressures against the need to ensure fiscal sustainability. Several countries have reaffirmed their commitments to medium-term fiscal sustainability. In Europe, Germany plans to reimpose their “debt brake” in 2023,[footnote 11] which would limit government borrowing, while France has set out commitments to get debt falling over the medium term.[footnote 12] The European Commission is consulting on changes to the Stability and Growth Pact, proposing to reintroduce the debt and deficit rules that have been suspended since the COVID-19 pandemic, while allowing member states more time to meet them.[footnote 13] Elsewhere, Canada[footnote 14] and Australia[footnote 15] have reiterated their commitment to reduce the debt-to-GDP ratio over the medium term. Fiscal policy decisions will be guided by updated fiscal rules, which require public sector net debt (excluding the Bank of England) to be falling as a percentage of GDP and public sector net borrowing to be below 3% of GDP by the fifth year of the rolling forecast. The debt rule will ensure that future policy decisions maintain the sustainable path achieved at the Autumn Statement. Alongside this, limiting borrowing will ensure debt reduction is delivered sustainably through tax and spend policy. Public sector net borrowing at 3% of GDP is broadly the level of borrowing which keeps debt on a downward trajectory, so a rule to keep borrowing below this level creates a clear path to ensure debt falls over the medium term. Targeting the fifth year of the forecast provides additional space to allow the economy to recover from the recession. The government is retaining the welfare cap, which ensures that welfare spending is sustainable. The cap will continue to apply to spending in 2024-25. In accordance with the Charter for Budget Responsibility, the level of the welfare cap and pathway has been adjusted to reflect a fiscally neutral change associated with the increase to the Universal Credit Administrative Earnings Threshold. The OBR confirm that the government is on track to meet both fiscal rules, as shown in Chart 1.4 and Chart 1.5. In the target year (2027-28), underlying debt falls to 97.3% of GDP and borrowing falls to 2.4% of GDP. Both rules are also met a year earlier than required. The welfare cap is forecast to be met in 2024-25, with the OBR forecasting welfare spending, subject to the cap, to be £138.2 billion, which is £0.6 billion below the cap.[footnote 16] While no longer a formal fiscal rule, policy decisions help to reduce the current budget deficit to just £5.6 billion in 2027-28. This is an important step towards reaching a position where day-to-day spending is funded through tax revenues. Chart 1.4: Public sector net debt (excluding the Bank of England) Source: Office for National Statistics (ONS code: CPOA) and Office for Budget Responsibility. Chart 1.5: Public sector net borrowing Source: Office for National Statistics (ONS code: J5IJ) and Office for Budget Responsibility. The rules are met with a buffer (“headroom”) of £9.2 billion against the debt rule and £18.6 billion against the borrowing rule in the target year. Headroom increases the resilience of fiscal plans, as it avoids the need to adjust policy if the forecast deteriorates, but the level needs to balance implications for public services, taxes and the economy. OBR analysis highlights that the headroom to underlying debt falling could be wiped out by a 0.4 percentage point increase in interest rates at all maturities, or equally would be doubled by a 0.4 percentage point fall.[footnote 17] The fiscal rules are published in an updated Charter for Budget Responsibility alongside the Autumn Statement. The Charter retains the commitment to consider wider data on the strength of the public sector balance sheet, including broader fiscal indicators such as public sector net worth. To ensure effective management of public sector assets and liabilities, an integral part of fiscal sustainability, the government will undertake periodic reporting on how it is managing them. This will set out the government’s objectives across the balance sheet, and how departments are delivering efficiencies through better management of their assets and liabilities. This builds on the Balance Sheet Review report published in 2020.[footnote 18] The government will look to publish the first report by the end of 2024.