Britain must brace itself for decades of austerity even after George Osborne's spending squeeze, to pay the price for an ageing population, the independent Office for Budget Responsibility (OBR) warned on Wednesday.
The OBR, set up by the chancellor to produce independent projections of the public finances, says the rising cost of healthcare and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.
Without fresh tax rises or spending cuts, the OBR says, the government's debt will hit a trough of 60% in the mid 2020s, compared with less than 70% now, before rising rapidly to hit 107% of GDP by 2060-61. Although the deterioration in the public finances is more than a decade away, the OBR urges politicians to make long-term decisions now, to prevent the economy drifting into a debt crisis as the population ages.
"Policymakers and would-be policymakers should certainly think carefully about the long-term consequences of any policies they introduce in the short term. And they should give thought too to the difficult choices that will confront this country once the challenge of the current consolidation has passed," the study says.
The OBR's report coincides with the publication of new "whole of government accounts" from the Treasury, which include new – and much larger – estimates of the state's long-term commitments, based on treating the government as though it were a business, with assets and liabilities.
The "net present value" of paying public sector pension promises – a way of calculating the cost if they all had to be paid today – had already hit almost 79% of GDP, or £1.1trn, by March 2010, according to the Treasury's calculations.
The price of Labour's Private Finance Initiative – Gordon Brown's favoured method for building new schools, hospitals and infrastructure without the Treasury paying the whole bill up front – is put at £40bn.
Meanwhile, the state's other "contingent liabilities", which the Treasury hopes it will never have to pay, such as guarantees to the crisis-hit banking sector, amount to more than £200bn.
Set against the government's assets, which the Treasury calculates to be worth £759bn, overall public sector liabilities now stand at £1.2trn, or 84.5% of GDP.
Despite these eye-watering estimates, however, the OBR says the main reason taxpayers must get used to decades of austerity is the growing burden of an ageing population, with its inevitable knock-on effects in terms of pensions and healthcare.
"Balance sheet measures look only at the impact of past government activity," it says. "They do not include the present value of future spending that we know future governments will wish to undertake, for example maintaining health, education and pension provision. And, just as importantly, they exclude the public sector's most valuable financial asset: its ability to levy future taxes."
They estimate that health spending will have to rise from 7.4% of national output in 2015-16 to almost 10% by 2060, while state pension costs will hit almost 8% of GDP over the same period, and social care costs increase to 2% of GDP.
Despite the hefty estimate of the net present value of public sector pensions, the annual cost of paying retired public sector staff will actually decline over time, the OBR says, because of the chancellor's decision to uprate them in line with the lower consumer price index measure of inflation, instead of the Retail Price Index.
by Heather Stewart taken from http://www.guardian.co.uk/business/2011/jul/13/age-austerity-continue-decades-obr
The OBR, set up by the chancellor to produce independent projections of the public finances, says the rising cost of healthcare and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.
Without fresh tax rises or spending cuts, the OBR says, the government's debt will hit a trough of 60% in the mid 2020s, compared with less than 70% now, before rising rapidly to hit 107% of GDP by 2060-61. Although the deterioration in the public finances is more than a decade away, the OBR urges politicians to make long-term decisions now, to prevent the economy drifting into a debt crisis as the population ages.
"Policymakers and would-be policymakers should certainly think carefully about the long-term consequences of any policies they introduce in the short term. And they should give thought too to the difficult choices that will confront this country once the challenge of the current consolidation has passed," the study says.
The OBR's report coincides with the publication of new "whole of government accounts" from the Treasury, which include new – and much larger – estimates of the state's long-term commitments, based on treating the government as though it were a business, with assets and liabilities.
The "net present value" of paying public sector pension promises – a way of calculating the cost if they all had to be paid today – had already hit almost 79% of GDP, or £1.1trn, by March 2010, according to the Treasury's calculations.
The price of Labour's Private Finance Initiative – Gordon Brown's favoured method for building new schools, hospitals and infrastructure without the Treasury paying the whole bill up front – is put at £40bn.
Meanwhile, the state's other "contingent liabilities", which the Treasury hopes it will never have to pay, such as guarantees to the crisis-hit banking sector, amount to more than £200bn.
Set against the government's assets, which the Treasury calculates to be worth £759bn, overall public sector liabilities now stand at £1.2trn, or 84.5% of GDP.
Despite these eye-watering estimates, however, the OBR says the main reason taxpayers must get used to decades of austerity is the growing burden of an ageing population, with its inevitable knock-on effects in terms of pensions and healthcare.
"Balance sheet measures look only at the impact of past government activity," it says. "They do not include the present value of future spending that we know future governments will wish to undertake, for example maintaining health, education and pension provision. And, just as importantly, they exclude the public sector's most valuable financial asset: its ability to levy future taxes."
They estimate that health spending will have to rise from 7.4% of national output in 2015-16 to almost 10% by 2060, while state pension costs will hit almost 8% of GDP over the same period, and social care costs increase to 2% of GDP.
Despite the hefty estimate of the net present value of public sector pensions, the annual cost of paying retired public sector staff will actually decline over time, the OBR says, because of the chancellor's decision to uprate them in line with the lower consumer price index measure of inflation, instead of the Retail Price Index.
by Heather Stewart taken from http://www.guardian.co.uk/business/2011/jul/13/age-austerity-continue-decades-obr
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