UK in line for 50-year squeeze, warns OBR
NHS spending and ageing population may derail efforts to keep deficit in check, writes Tim Wallace
Britain faces 50 years of tax increases and spending cuts as the ageing population means government debts will spiral out of control if action is not taken. The national debt will more than triple from 85pc of GDP now to more than 280pc in 2067, the Office for Budget Responsibility said, as 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 in previous forecasts.
Unless preventive 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.
“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,” said Robert Chote, head of the OBR.
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 debts.
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 believes. 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 says 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 a 2pc level.
However, the Treasury is not currently expected to balance the books by 2025, and extra spending makes this even less likely.
Meanwhile, the OBR says 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 that loses the Government money.