A contingent liability is a potential future obligation that depends on whether a particular event occurs. It is not certain, and it may never materialise, but governments and firms must still disclose them because they can create significant fiscal risks.
Key Features
Uncertain timing and value.
The liability only becomes an actual obligation if a specific event happens (e.g. a bank collapse, legal case loss).
Not part of headline debt or deficit.
Because nothing has yet been paid, contingent liabilities sit off-balance-sheet, but they still matter for financial stability.
Difficult to estimate.
Probabilities and costs are often unclear, making them hard for central banks and bond markets to price.
Types of Contingent Liabilities
1. Explicit contingent liabilities (clearly stated in law or contract):
- Government loan guarantees to firms or banks (e.g. Bailout to Northern Rock/RBS in the aftermath of the 2008 credit crisis)
- Deposit insurance schemes (bailout to customer deposits)
- Guarantees on infrastructure PFI projects
- Legal claims against government, e.g. government sued over breaking international law
2. Implicit contingent liabilities (not legally required but politically expected):
- Bailouts of banks or failing industries
- Natural disaster support
- Rescue of local authorities or pension funds
UK Contingent Liabilities 2025
The OBR report contingent liabilities in 2025 is £250 billion or 8.5% of GDP. By far the largest is the £115bn liabilities relating to the costs of decomissioning nuclear sites. The next biggest liability is clinical neglicence for lawsuits about health care. The third biggest relates to decommissioning oil and gas fields in the north sea. These liabilities are expected to last over 30 years.
UK Contingent Liabilities
OBR JULY 2025
Issues with Contingent Liabilities
Fiscal risk
If triggered, they can cause sudden spikes in public debt. Example: during 2008–09, bank bailouts turned contingent risks into real costs.
Moral hazard
Knowing the government may step in can encourage risky behaviour—e.g. banks taking on excessive leverage. This was definitely a factor behind the excess credit growth of 2000-2008. Moral hazard means individuals take more risk because they know the government will bailout bad choices.
Debt sustainability concerns.
Rating agencies and investors monitor these risks. A country with low official debt but large hidden contingent liabilities may face higher borrowing costs.
Examples of contingent liabilities paid in the UK
- Student loans in the UK. The government guarantees repayment shortfalls, effectively creating a long-term contingent liability.
- Nuclear clean-up obligations (e.g., Sellafield). Costs are uncertain and may rise.
- NHS Resolution. £3.1 billion was paid out in 2024/25 for compensation and associated costs on all of NHS Resolution’s clinical schemes. (link)
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