Fiscal Risks and Sustainability Report

Rachel Reeves Excerpts

Tuesday 8th July 2025 Written Statements

[The Chancellor of the Exchequer (Rachel Reeves)]

At the Budget last October, and again in the spring, I made the necessary choices to fix the foundations of our economy, to put the public finances on a sustainable path and to support growth. The 2025 spending review delivered on this strategy, underpinning fiscal plans with firm spending plans, and providing the certainty and stability essential for 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 2025 Fiscal Risks and Sustainability Report (FRS), which has been laid today—CP 1343—is an important part of the Government’s effective fiscal risk management framework. The report fulfils the OBR’s obligation, set out 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 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 recognise 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, the 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 budget, with an ambition to reach 3% in the next Parliament.

Making Britain a clean energy superpower, which will be achieved through delivering home-grown 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 recognise 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 home-grown 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 are 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 that addresses long-term challenges and provides greater transparency of the public finances. That is why the Government announced the financial transaction control framework at the autumn Budget 2024, ensuring that investments generate either a financial return or a clear benefit for taxpayers, and committed to publishing an annual report on the performance of the Government’s financial assets.

The FRS also examines the potential fiscal risks from the UK’s pensions 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 pensions market is affecting demand for gilts from the sector, and the Government have 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 continue to monitor market trends.

I would like to thank the OBR for its efforts in producing this report. The Government are required to respond to the FRS within a year.

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