Fiscal Risks and Sustainability Report 2025
At the Budget last October and again in the spring, I made the necessary choices to fix the foundations of our economy, put the public finances on a sustainable path, and support growth. Spending Review (SR) 2025 delivered on this strategy, underpinning fiscal plans with firm spending plans, and providing the certainty and stability essential to growth. These spending plans are only possible because of the decisions taken in the autumn to raise taxes, and the changes to the fiscal rules.
The Office for Budget Responsibility’s (OBR) 2025 Fiscal Risks and Sustainability Report (FRS), laid today [CP 1343], is an important part of the government’s effective fiscal risk management framework. The report fulfils the OBR’s obligation in the Charter for Budget Responsibility to examine and report on the sustainability of, and risks to, the public finances. This year’s report examines climate change, the public sector balance sheet, and pensions.
The OBR notes in the FRS that the government’s reforms to improve the fiscal framework have strengthened fiscal policy making and reduced fiscal risks. This includes legislating for the fiscal lock to ensure that no government can announce fiscally significant measures without being subject to an independent assessment by the OBR, as well as introducing extended departmental spending planning horizons by committing to hold an SR every two calendar years, setting Departmental Expenditure Limits (DEL) for a minimum of three years of the five-year forecast period. The government also introduced robust new fiscal rules that embed stability.
The FRS also highlights that recent global shocks have resulted in greater uncertainty and fiscal pressures amid a shifting international landscape. The government recognises these challenges, which is why we have acted decisively to strengthen our partnerships and grow the economy, including through recent trade deals with the US, EU, and India. National security is the first duty of the government, and we have responsibly responded by committing to increase spending on defence to 2.6% from 2027, funded from reductions in the Official Development Assistance (ODA) budget, with an ambition to reach 3% in the next Parliament.
Making Britain a clean energy superpower, which will be achieved through delivering homegrown clean power by 2030 and accelerating to net zero, is a key mission in the government’s Plan for Change. Building on previous analysis, the 2025 FRS offers an assessment of the fiscal risks posed by climate change and the transition to net zero, concluding that the UK faces increasing costs from climate-related damage. The government recognises this, which is why SR 2025 allocates £9.4 billion to Carbon Capture, Usage, and Storage over the SR period and invests more than £8.3 billion in homegrown clean power through Great British Energy and Great British Energy-Nuclear. We will set out further details in the updated Carbon Budget and Growth Delivery Plan in October. The government is also investing more than £4.2 billion over three years, from 2026-27 to 2028-29, to build and maintain flood defences.
The OBR also highlights the risks associated with the public sector balance sheet, which is why it is more important than ever to have a robust fiscal framework which addresses long-term challenges and provides greater transparency of the public finances. That is why the government announced the Financial Transaction Control Framework at Autumn Budget 2024, ensuring investments either generate a financial return or a clear benefit for taxpayers, and committed to publishing an annual report on the performance of government’s financial assets.
The FRS also examines the potential fiscal risks from the UK’s pension system, noting the challenges presented by an ageing population. The Final Report of the Pensions Investment Review was published in May, setting out the government’s plans to drive investment and higher returns through large Defined Contribution schemes and reforming the Local Government Pension Scheme to improve sustainability and support regional growth. However, further work is required to tackle systemic issues and inequality. The next phase of the Pensions Review will focus on the adequacy of pensions outcomes.
The changing structure of the pension market is affecting demand for gilts from the sector, and the government has therefore adjusted the maturity split of gilt issuance to account for this trend, with the proportion of long-dated gilt issuance reduced materially over recent years. The government continues to monitor market trends.
I would like to thank the OBR for their efforts in producing this report. The government is required to respond to the FRS within a year.