Yahoo Finance Ageing population puts UK on track for 'unsustainable' surge in debt, warns OBR
The UK could face 50 years of tax increases and spending cuts as the costs of an ageing population send Government debt spiralling, the Office for Budget Responsibility (OBR) has warned.
The national debt will more than triple from 85pc of gross domestic product (GDP) now to more than 280pc in 2067, the OBR said, as the surging costs of healthcare and pensions combine with a shrinking proportion of workers to pay for it all, creating an “unsustainable” burden.
Its projections are becoming even more stark as Britain is expected to have fewer working-age migrants and a lower birth rate than previously forecast.
Unless preventative measures are taken, demographic changes plus the rising cost of sustaining a modern healthcare system will drive the primary deficit - the Government’s annual borrowing before interest payments - up from 0.3pc of GDP in 2022-23 to 8.6pc in 2068.
Robert Chote, head of the OBR said: “This would reverse almost all the improvement in the primary balance that we expect between 2009-10 and 2022-23, the period of consolidation following the financial crisis.”
As a result the Government needs to repeat the tax rises and spending cuts of the last decade, spreading the process over the next 50 years if it wants to avoid backsliding towards higher debt levels.
Even if the primary deficit can be held at this 0.3pc level forever through tough tax and spending decisions, the national debt will only decline very slowly.
At this rate the national debt will fall to 66.9pc of GDP in 50 years’ time, still far above its pre-financial crisis level of around 40pc.
To target that 40pc level, the UK would need fiscal tightening of around 1.9pc per decade, the OBR said.
Recently announced plans to spend an extra £20bn per year on the NHS have not addressed the long-term problems the service faces, the OBR warned.
The rising pressures will still apply, and will begin from a higher starting point, so the extra spending now will amount to an extra deficit of 1.5pc in 2067-68, increasing the national debt by 58pc of GDP over the decades.
The OBR said it is not clear how even the first few years of this NHS spending will be funded.
The Government said it would come partly from a “Brexit dividend” as the UK stops paying its annual fee to Brussels, with the rest coming from “us as a country contributing a little more”.
Officials are sceptical, however, as any economic slowdown after Brexit will hit Government finances.
OBR forecasts indicate the UK would have spent £13.3bn on the EU in 2022-23 if it remained a member. However, £7.5bn is going on the divorce bill that year, and much of the remaining £5.8bn has already been committed elsewhere.
“That [£5.8bn] would in principle cover a little under 30pc of the extra health spending announced for that year, but that ignores other Brexit-related calls on those savings, including commitments the Government has already made on farm support, structural funds, science and regulatory bodies, and possible continued contributions to the EU budget,” said Mr Chote.
“While we await more detail, we have assumed here that the extra spending on health adds to total spending and borrowing.”
As a result of this extra spending the Government will use up almost all of its financial headroom but should just about keep its deficit below 2pc.
However the Treasury is not currently expected to balance the books by 2025, and extra spending will make this even less likely.
Chancellor Philip Hammond said he remains committed to keeping the deficit down.
“We have made excellent progress reducing Government borrowing by three quarters and, as a result, our national debt is due to begin its first sustained fall in a generation,” he said.
“We can be proud of this achievement but – as today’s reports clearly illustrate – we cannot be complacent. We must continue to deliver on our commitment to fix our public finances, and we must reject the arguments of those who think that debt can rise again without consequences.”
Separately, the OBR said the way student loans are accounted for in the public sector finances creates a “perverse incentive” to sell off portfolios of loans at a price which loses the Government money.
