Chancellor Rishi Sunak (Image: PA)

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Britain faces three large and “potentially catastrophic” risks from the pandemic, climate change and a ballooning debt mountain, the UK’s fiscal watchdog has warned.

The Office for Budget Responsibility (OBR) said the UK faces the triple threats as it emerges from the “largest peacetime economic and fiscal shock in three centuries”.

In its latest fiscal risks report, it cautioned that delayed action on climate change could lead to a marked hit to Britain’s economy and impact the mammoth public debt levels, currently at more than £2 trillion.

And it cautioned that the Government is facing a potential £10 billion spending black hole following the pandemic over the next three years.

This is due to “unfunded legacy costs of the pandemic” across areas including health, education and transport and pose a material risk to the public spending outlook.

In the report, it said if action to cut carbon emissions was delayed, it could lead to a 3% additional impact on gross domestic product (GDP) and debt would be 23% of GDP higher than if early action is taken by 2050-51.

The OBR has set out what the fiscal risks it calculates the UK faces
(Image: Getty Images)

But the OBR said its baseline scenario of early action to achieve net zero would see the impact on the UK’s debt mountain be less severe than that of the coronavirus crisis, adding 21% – or £469 billion – of GDP to net debt by 2050-51.

“This is somewhat smaller than the addition to net debt as a result of the pandemic,” said the OBR.

In a stark warning over the fiscal threat posed by climate change, it said if there was no action at all to reduce emissions, UK debt would rocket to reach 289% of GDP by the end of the century.

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The report showed the OBR still expects Britain’s economy to recover to pre-pandemic levels by the middle of next year, but it reiterated that it will likely suffer a 3% permanent hit from pandemic.

The OBR cautioned that rising inflation and potential interest rate hikes to tackle the increasing cost of living could put the the UK’s debt mountain under yet more pressure.

Inflation and rising wage costs could also see the Government face a £3 billion bill from its so-called triple lock state pension pledge.

While the OBR did not update its economic or borrowing forecasts in the report, it said the economy had proved “surprisingly adaptable and resilient to the coronavirus shock”.

Having plunged by 10% in 2020 – one of the deepest recessions of the advanced economies – it has since begun recovering at a blistering pace, helped by nearly £400 billion of Government support and measures.

This means the economy will recover just over two years after the crisis struck, compared with the four-and-a-half years it took to rebound following the financial crisis, according to the OBR.

But it added a note of caution that major economic shocks may be becoming more frequent, with the financial crisis and pandemic within just over a decade of each other.

“The arrival of two major economic shocks in quick succession need not constitute a trend, but there are reasons to believe that advanced economies may be increasingly exposed to large, and potentially catastrophic, risks,” the OBR said.