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

The Government’s debt mountain will soar to “unsustainable” levels even under the Chancellor’s new fiscal rules, official figures show.

Rachel Reeves last week scrapped the old method of measuring public debt, paving the way for saddling future generations with huge liabilities.

Its new rules will allow it to borrow up to £50bn more while claiming it can balance the books.

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

On Wednesday, Reeves will kick off the massive debt binge in his first budget, which will include “painful” tax raids on pensions, inheritances and capital gains.

Conservatives described the change in debt rules as a “fiddle”.

Reeves says it will lay the foundations for “sustainable growth” based on “long-term” investments in public services such as the NHS and in key sectors such as infrastructure, green energy and life sciences to drive growth.

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

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

Its report on fiscal risks and sustainability noted “an aging population.”

He highlighted “a drop in the birth rate” and added that the “baby boom” generation, born between 1945 and 1964, is retired or heading in that direction.

This, the OBR said, means that less tax is likely to be raised and that there will be a greater need to spend on health, care and pensions for growing numbers of older people.

The cost of servicing interest on the growing debt is also expected to skyrocket, placing a huge financial burden on our children and grandchildren.

According to the OBR, interest payments will account for almost a third of government income in 2074, compared to 7 per cent today.

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

PSNFL is a broader measure of debt than currently used, meaning the debt ratio 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 will eventually be repaid – rather than counting the entire loan portfolio as a liability.

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

Financial markets are ready to see how much of the extra £50bn cushion the Chancellor will use in her budget.

Reeves says he will put up “guardrails” to calm them down and prevent taxpayers from wasting taxpayer money on expensive pet projects.

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