Revealed: £1 in every £5 of future generations’ taxes set to go on debt interest - IPPR

• Debt interest on course to absorb more than a fifth of government revenue by 207475, finds IPPR 
• UK is not on a fiscally sustainable track due to failure to tackle long-term pressures and short-sighted fiscal rules
• IPPR says government should carefully review fiscal framework in next parliament 

Future generations are on track to see one in every five pounds of government revenue swallowed up by debt interest, according to new analysis by the Institute for Public Policy Research (IPPR). 

The report warns this outcome is not just driven by low growth and demographic pressures, but also by financial markets and a fiscal framework focused too strongly on narrow medium-term targets, and not enough on longer-term fiscal risks and opportunities.  

New IPPR modelling shows that debt interest could account for 21.3 per cent of government revenue by 207475 under the most likely scenario. In the worst case, this share could soar to 47.0 per cent, while under the most positive scenario, it would remain stable at 7.6 per cent. 

This would be a heavy burden on those born over the next 15 years, known as Generation Beta'. But gradual reform can avoid these costs piling up over time and keep debt costs sustainable.  

A well-targeted package of reform and long-term investment including action on preventive health, climate resilience and productivity could significantly improve the outlook, reducing debt interest by 8 percentage points of revenues over the same period, before any tax changes. 

IPPR is not calling for a big change in borrowing plans right now, arguing that the UK's short-term market risks are very real, including high borrowing costs. The authors say with the Iran shock continuing to affect the economy, the risk of even higher borrowing costs means the government should stick to its fiscal rules and only change the borrowing path only for policies that are key for growth or help reduce inflation.  

However, the government should begin developing a new fiscal framework in the next parliament, to be introduced from a position of strength once the existing rules have been met. The framework should distinguish between borrowing that builds long-term capacity and borrowing that merely adds to liabilities, enabling governments to balance short-term costs against long-term sustainability. The government could also already outline its long-term fiscal strategy formally, being transparent on how it plans to address neglected long-term risks. 

IPPR recommends: 

• In the next Parliament, developing a new fiscal framework that can assess the long-term fiscal value of today's policy decisions. This should account not only for upfront costs, but also for the long-term benefits of preventive health measures, industrial policy investments and climate resilience programmes, alongside a clear strategy for reforming revenue-raising. 

• Publishing a fiscal sustainability dashboard, bringing together indicators across short, medium and long-time horizons, including on borrowing, debt structure, public assets, future spending pressures and investment impacts. 

• Adopting a debt servicing ratio as backstop metric, so fiscal sustainability is judged by the burden of debt interest on revenues, which is the intuitive measure for both citizens and financial markets. The backstop should require change if the ratio rises above an adjustment zone threshold. 

William Ellis, senior economist at IPPR, said: 

Our current fiscal framework is not fit for purpose, and blind to the risks that decide long-term sustainability. On the current path, we will see the government paying £1 in every £5 gained by 2074 just to pay our interest costs - but well-targeted reform and investment could nearly halve that burden. 

This is not a call to significantly change the borrowing pathway now. The government should stick to its existing rules, and any reform must come in the next parliament, from a position of strength once those rules have been met.  

A reformed framework should make the trade-offs between short term investment and addressing long term problems visible. Fiscal plans should be held to account on the debt servicing ratio, supported by a dashboard of indicators, and underpinned by a long-term strategy.