Britain's quiet debt fix: minimum-wage workers in the 40% tax band

Imagine a supermarket worker in the late 2060s. She is on the minimum wage, working full time. Yet the tax system treats her as a higher-rate taxpayer.

That is not because Parliament has voted to put low-paid workers into the 40% tax band. It is what happens if governments keep doing what they already do: let tax thresholds lag behind earnings.

This matters because Britain's long-term debt path is not sustainable. On current policy, the Office for Budget Responsibility says public debt starts rising again in 2032-33 and is on a "clearly unsustainable upward trajectory" by the late 2040s. Stabilising debt near today's level from 2031-32 would require a permanent adjustment of 3.8% of GDP.

That is the explicit version of the repair: tax more, spend less or both. The quiet version is fiscal drag. It does not require a chancellor to announce a large tax rise. It lets wage growth pull workers into higher bands over time.

Where that road leads, the OBR has modelled. By 2075-76, around two-thirds of the income distribution faces a marginal rate of 40% or more. A full-time worker on the adult minimum wage, the National Living Wage, becomes a higher-rate taxpayer in the late 2060s. It may be the nearest thing Britain has to a politically plausible debt plan.

So the core choice is not whether Britain adjusts. It is whether the adjustment is made openly, through reform, or quietly, through the tax system.

Two numbers matter in the OBR report, and they are easy to confuse.

First: 3.8% of GDP. That is the permanent adjustment needed from 2031-32 to keep debt near today's level. In plain English, the state would need to tax more, spend less or both, by about that amount every year. It is the clean version of the repair.

Second: the fiscal-drag scenario. That asks what happens if tax thresholds rise only with prices, not earnings, for the next 50 years. Since 2021 governments have gone further and frozen them outright, so the scenario is a gentler version of the current habit. It is not the same as the 3.8% adjustment. It is one politically convenient way of delivering much of that adjustment without announcing it as one.

Nor does the OBR present fiscal drag as a neat 3.8% package. On its own tables, 50 years of threshold drag cuts the required adjustment from 3.8% of GDP to 1.1%, covering about 2.7 of the 3.8 percentage points, at the price of pushing much more of the workforce into higher marginal tax rates.

Fiscal drag is already built into the near-term numbers. Extending it for 50 years is the OBR's illustration of the path of least resistance. It raises a great deal of money, but the cost lands on ordinary earners.

So fiscal drag is not a separate fix on top of the 3.8% adjustment. It is an alternative path in which much of the adjustment arrives through higher tax on work rather than through an announced Budget package. Britain can reprice promises openly, or it can let the tax system do the work slowly, unevenly and silently.

To be precise about the scenario: thresholds rise with prices but trail earnings for the next 50 years. That is gentler than the cash freeze actually run since 2021. Even so, the OBR finds it roughly halves the 2075-76 debt level, from 300% of GDP to about 150%, without touching a single spending promise.

Its burden shows up in tax bands. In the OBR's baseline, where thresholds track earnings, about a quarter of the income distribution sits above the higher-rate threshold by 2075-76. Under the drag scenario, it is around two-thirds.

More striking still is the result lower down the income scale. A full-time worker on the National Living Wage crosses into the higher-rate band in the late 2060s.

Across the income distribution, the average effective tax rate on employment income rises from 21% to 31%. That is roughly a 50% increase.

This is not an exotic thought experiment. The machinery already exists. There is a 62% marginal rate between £100,000 and £125,140. Some families face rates above 100% when childcare support is withdrawn. Universal Credit has a 55% taper. Plan 2 student loans add 9% above £29,385.

Rather than invent a new system, the OBR's scenario extends the existing one.

By 2030-31 the tax take is already heading for 42.7% of GDP, close to the highest on record. Long-term drag has a labour-supply cost too, put by the OBR at the equivalent of about 2m average-hours workers by 2075-76; the report says the higher rates would materially weaken work incentives, so even the quiet plan yields less than it appears. And the IMF has warned that Britain's scope for further revenue increases is becoming limited without more fundamental tax reform.

Fiscal drag is attractive because it is quiet. It raises revenue without a headline rate rise.

Paragraph 5.13 of the report carries the key sentence. Debt, it says, "begins rising from 2032-33 and reaches a clearly unsustainable upward trajectory by the late 2040s". A 25-year-old today will then be 47.

Debt is now about 94% of GDP. It stays near that level while the government's planned consolidation runs through the next decade. Then the primary surplus disappears, and the state returns to borrowing before it has paid a penny of interest.

By the end of the projection, the state is borrowing about a fifth of GDP each year. Debt interest alone reaches 12% of GDP, more than the NHS costs today.

Comparison with 1946-47, when debt reached 249% of GDP, is not exact: the OBR's long-run series splices an older gross-debt measure onto the modern public-sector net-debt measure. But the direction is clear enough. Britain's fiscal path is not merely strained. It ceases to be credible.

None of this means the OBR expects the state to borrow on that path until 2075. It expects the path to be stopped, which means the correction comes earlier.

Start with the clean repair, which the report prices. From 2031-32, keeping debt near today's level would require a permanent tightening of 3.8% of GDP: higher taxes, lower spending or both, every year. In today's money that is roughly £120bn a year, more than £4,000 per household.

This is not a forecast of what any chancellor will announce in 2031. It is a yardstick. It tells us the size of the hole if Britain chooses to stabilise debt early.

Politically, the easier path is not to announce the whole adjustment. It is to let fiscal drag raise part of the money, then make up the rest through slower spending growth, service rationing, welfare tightening, pension reform or later tax rises.

Waiting makes the yardstick larger. If the adjustment is delayed until 2052-53, the required tightening rises to about 8% of GDP. David Miles, one of the OBR's Budget Responsibility Committee members, made the same point in the Financial Times: the adjustment could be twice as large if made in the middle of the century rather than in the early 2030s.

Generationally the implication is clear. Early action spreads the burden. Delay shifts it to future taxpayers.

Both of the common escape routes get tested in the report. More people is one. Faster growth is another. Neither is enough.

One scenario adds 9m people by 2075 through higher birth rates and lower death rates. Debt ends up roughly 40 percentage points of GDP higher than in the baseline, at around 340%. GDP per person is about 6% lower. Migration is held constant throughout: this scenario tests births and longevity, not migration policy.

Children and the very old cost the state more than they pay in, and the additional workers arrive too late to cover the extra spending. A larger population is not automatically a fiscal gain. Its age structure matters.

Faster productivity growth helps more. In the OBR's optimistic scenario, Britain regains its pre-financial-crisis productivity trend. Debt still rises to about 180% of GDP by 2075-76. That postpones the crisis by around 15 years; it does not avoid it.

Growth helps only if governments save the proceeds. If public spending rises with the extra growth, debt still reaches about 270% of GDP.

Ageing is the main pressure.

Health spending rises from 8.4% of GDP at the start of the projection to 13.5% at the end. State-pension spending rises from 5% to almost 9%. Education spending falls because there are fewer children, but not by enough to offset the increase in health and pensions.

New population projections make the arithmetic worse: the ONS expects deaths to exceed births from this year onwards, and to do so for the next 50 years. Switching to those projections added 71 percentage points of GDP to the OBR's 2075-76 debt figure.

Then come shocks. Over the past two decades the financial crisis, covid and the energy shock drove most of the rise in public debt, and none of it was subsequently unwound. "Ratcheting" is the OBR's word for the pattern. Drawing on historical and international evidence, its shock scenario now assumes a major fiscal shock on average every nine years, each adding around ten percentage points of GDP to debt.

Interest does the rest. For the first time, the OBR has modelled how higher debt feeds back into borrowing costs: the baseline alone pushes long-run interest rates up by 2.2 percentage points. In a worse scenario, with larger deficits, repeated shocks and higher rates, gilt yields reach 9.6% and debt exceeds 1,000% of GDP.

That is presented as an illustration of an impossible path, not a forecast. But the warning is obvious. Britain already pays high borrowing costs by rich-country standards.

Behind the debt path sits a series of promises that cost more than advertised.

Clearest of them is the triple lock. When it was introduced, its annual cost by the end of this decade was estimated at £5.2bn. The OBR now puts the cost at £15.5bn by 2029-30, three times the original figure.

In eight of its first 14 years, the triple lock was triggered by inflation or by the 2.5% floor, not by earnings. Over the next 50 years it accounts for about a third of the projected rise in pension spending.

This is not an argument about pensioners. It is an argument about design. A formula sold as an earnings link has repeatedly ratcheted spending above earnings.

Something similar runs on the tax side. Freezing personal-tax thresholds while wages rise is now a large fiscal instrument. Since 2021 wages have risen by about 20%, while thresholds have lagged behind. By 2030-31 the freeze raises more than £60bn a year.

It is a tax rise that did not have to be announced as one.

Some liabilities sit outside the headline debt measure altogether: £1.31trn of net public-sector pension promises, recorded in the Whole of Government Accounts at March 2024. The National Audit Office has refused to sign off those accounts three years running because many local authorities have not produced audited books.

Visible debt interest alone is £110bn this year, the third-largest item of public spending after health and welfare.

A permanent tightening of 3.8% of GDP can come only from large items.

First, income tax. This is already happening through frozen thresholds. Ordinary earners move into higher bands without Parliament voting for a headline tax rise.

Second, pensions. Replacing the triple lock with earnings uprating, smoothing one-off inflation spikes, raising the state-pension age faster, narrowing pensioner benefits. The arithmetic is clean; the politics is not.

Third, health and care: productivity, rationing, more private contribution at the edges or a smaller promise. Waiting lists are already a form of rationing.

Fourth, working-age welfare. Eligibility, work requirements and uprating rules can all be tightened.

That is the menu. The likely order is different. Stealth tax first, because it is already running. Service decay second, because longer queues and weaker local services rarely require a single dramatic vote. Working-age welfare before pensions, because its recipients are a weaker political bloc. Pension reform last, probably after a Budget panic or a market warning.

Early reform is the cleanest course.

Replace the triple lock with earnings uprating and the state pension still rises with national earnings, while spending on it ends about 1.8% of GDP lower by 2075-76. Uprate non-pension benefits with prices rather than earnings and their cost more than halves as a share of GDP over 50 years. Act in 2031 and the adjustment is about 3.8% of GDP. Wait until 2052 and it is about 8%.

Pensioners are not the problem. The problem is promises made to one electorate and billed to another.

Britain will probably choose the slower course. Freeze thresholds. Let queues grow. Squeeze working-age welfare. Touch pensions last. Call each step unavoidable.

With the OBR's numbers, that path now has a price and a set of dates. Every year of delay is a choice.

Put plainly: Britain's debt path has to be corrected, no government wants to announce the correction, and the correction that arrives by default is ordinary workers, eventually even minimum-wage workers, taxed at rates built for the well-paid.