Fiscal risks report – July 2021

Our two biennial reports on the long-term sustainability of the public finances (Fiscal sustainability report) and fiscal risks facing the UK (Fiscal risks report) will be combined into a single annual report for the first time this summer. Our first report on Fiscal risks and sustainability will be published on Thursday 7 July. Learn more about this upcoming report.

Commissioned by Parliament in 2015, the report identifies and analyses risks to the medium-term outlook for the public finances and to long-term fiscal sustainability.

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Fiscal risks report – July 2021

July 6, 2021 – 2.67 MB

This year we cover three large, and potentially catastrophic risks, in depth:

  • The economic and fiscal impact of the coronavirus pandemic over the past year and its potential medium- and long-term legacy for the public finances.
  • The risks to the public finances presented by climate change including a range of scenarios illustrating the fiscal impact of different ways to get to net zero by 2050.
  • The risks posed by changes in the cost of debt and the sensitivity of the public finances to global interest rates, inflation and an extreme case of a loss of investor confidence.

Supporting documents

Presentations

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

Assessing ‘fiscal space’

Chart A: Estimates of government debt limits, thresholds, and targets (bar chart)
Fiscal space is an important consideration for how quickly and effectively a country's government can respond to a large shock. In this box, we explored different definitions of fiscal space over time, its multi-faceted nature and how the UK's position has evolved over the course of the coronavirus pandemic.

Cross-cutting categories: Fiscal risk management, Coronavirus

The CJRS and unemployment

Chart A: Change in employment-related indicators during the pandemic (bar chart)
The Government announced in March 2021 that the coronavirus job retention scheme (CJRS) would be phased out completely by the end of September 2021. In this box, we looked at the latest evidence on the number of people on the scheme and their concentration in certain industries, as well as the latest data on vacancy rates. We also discussed how these data related to our labour market assumptions from March 2021.

Economy categories: Labour market, Employment and unemployment

Fiscal categories: Public spending

Cross-cutting categories: Coronavirus

Accounting for natural capital

Broader measures of the balance sheet are useful to consider when thinking about fiscal sustainability. However, under the national accounts framework even the broadest measures fail to recognise natural assets – the very assets affected by climate change. The box discussed the frameworks under which the ONS produces the environmental and natural capital accounts, and which bodies are working to address the gaps in these frameworks. The box also discussed key messages from the Dasgupta Review and Treasury’s response.

Cross-cutting categories: Public sector balance sheet, Climate change

The transition to electric vehicles

Chart A: New car registrations and total care stock by power type
With the sale of new petrol and diesel cars to be banned from 2030, the transition to electric vehicles is a key element in the UK’s path to net zero emissions. This box outlined the recent growth in alternatively fuelled vehicle sales, the fiscal implications of this and the role of policy in the transition.

Fiscal categories: Receipts, Vehicle excise duties, Fuel duty

Cross-cutting categories: Climate change

Decarbonising domestic heating: lessons from the switch to natural gas

One of the greatest challenges in achieving net zero in terms of both cost and technical difficulty will be to decarbonise the more than 28 million homes in the UK that rely on fossil fuels for heating (typically gas central heating) and are, for the most part, poorly insulated. In this box we examined the similarities and differences between the future transition of domestic heating and one of the past, that of the switch to natural gas over the decade to 1977.

Fiscal categories: Public spending

Cross-cutting categories: Climate change

Face and market value of debt securities in official statistics

Chart A: Face versus market value of gilts held by the private sector (line chart)
Government debt liabilities can be valued in various ways. In recent years market and face values have diverged sharply reaching 15% of GDP. In this box we explained why this has happened and why we use face value in our analysis.

Fiscal categories: Public sector net debt, Debt interest spending

Cross-cutting categories: Public sector balance sheet

A simple analytical model of the capital market

Figure A: Determination of rates of return
The yields on government debt have declined over recent decades. This box described a stylised model that provides a framework to explain the drivers of these changes.

Economy categories: Interest rates

Fiscal categories: Debt interest spending

The impact of the pandemic on real interest rates

Chart B: The impact of past pandemics and wars on interest rates (swathe chart)
Past pandemics have had long-run impacts on real interest rates. A recent paper found that 20 years after a pandemic real rates fell by, on average, 1.5 percentage points (though less in the UK). This box examined the evidence for the current pandemic and suggested why this time it may be different.

Economy categories: Interest rates

Fiscal categories: Debt interest spending

Cross-cutting categories: Coronavirus

Long run drivers of UK government debt

Chart C: Distribution of changes in the UK debt-to-GDP ratio (bar chart)
The history of UK government debt can be characterised as one of ‘punctuated equilibria’ in which long periods where the debt-to-GDP ratio is broadly stable or gradually falling are interspersed with occasional large increases in response to major shocks. This box looked at the instances of parge rises since 1900 and the long period of debt reduction after the second world war.

Fiscal categories: Public sector net debt

Cross-cutting categories: Coronavirus

The fiscal impact of the Asset Purchase Facility

Chart D: Net savings to the public sector of the APF in our scenarios (line chart)
The Asset Purchase Facility (APF) houses the assets purchased by the Bank of England as part of its programme of quantitative easing. This box explained how this lowered interest rates benefitting the Treasury by £113 billion to date but it also increased the sensitivity of interest payments to future rate rises. The box showed how the cash flows to and from the APF change under various scenarios.

Fiscal categories: Debt interest spending

The fiscal risks posed by cyberattacks

Chart A: Significant cyberattacks since 2006 (bar chart)
Cyberattacks are a growing global threat that, at the time of writing, had yet to cause sufficient disruption to national infrastructures to generate material economic and fiscal harm. We had not yet quantified the potential fiscal cost from cyberattacks, but included it in our Fiscal risk register for the first time. The box covered some of the potential types of cyberattack, their increasing prevalence and the mechanisms through which they might generate direct and indirect fiscal costs.

Cross-cutting categories: Financial sector