Net-zero carbon target may inflate UK debt by less than pandemic -OBR

July 6, 2021

By William Schomberg

LONDON (Reuters) -The impact on Britain’s public debt mountain caused by moves to meet the 2050 net carbon zero target will be huge but could be less severe than that of the coronavirus pandemic if global action is taken quickly, a fiscal watchdog said.

The Office for Budget Responsibility said its early-action scenario added 21% of gross domestic product to public sector net debt in 2050-51, or 469 billion pounds ($650 billion) in today’s terms.

While a huge increase in historical terms, “that is somewhat smaller than the addition to net debt as a result of the pandemic,” the OBR said in a report on future budget risks.

That scenario assumed the government would take on about a quarter of the 1.4-trillion-pound cost of making Britain’s economy net carbon zero by 2050, or a net cost of 344 billion pounds when combined with energy-efficiency savings.

“But spread across three decades, this represents an average of just 0.4 percent of GDP a year,” the report said.

In a delayed-action scenario, with no decisive action taken against climate change by 2030 before being rushed out, debt in 2050-51 would be 23% of GDP higher than in the early-action scenario.

If no action is taken, debt would rocket to 289% of GDP by the end of the century, up from about 100% now.

Earlier on Tuesday, Richard Hughes, the OBR’s chairman, said Britain’s 2-trillion-pound ($2.8 trillion) debt mountain is becoming more exposed to inflation and interest rate shocks which are themselves becoming more frequent.

Hughes said the OBR expected the current rise in inflation – which could surpass 3% according to the Bank of England – would be temporary as the economy recovered from pandemic lockdowns.

But he said the government’s debt stock is increasingly vulnerable to the risk of higher inflation and interest rates, with shorter average maturities and more inflation-linked bonds.

“It used to be the case that governments could inflate their debt away. It is less and less the case as we go into the future,” Hughes told BBC radio.

“We are two decades into the 21st century but governments have already faced two once-in-a-century shocks – in the 2008 financial crisis and the 2020 coronavirus pandemic – and there are reasons to believe that these kind of major shocks are becoming more frequent and more severe.”

Hughes said demands for more spending on health, education and on transport, which has been hit by lower passenger numbers due to the pandemic, could cost an extra 10 billion pounds a year which is not included in finance minister Rishi Sunak’s spending plans.

Sunak has authorised extra spending and tax cuts worth around 350 billion pounds since the start of the pandemic, saddling Britain with its biggest ever peacetime budget deficit.

He has promised to get the public finances back on “a sustainable footing”.

($1 = 0.7204 pounds)

(Writing by William Schomberg; editing by Michael Holden and Mark Heinrich)

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