Your location:

Our fiscal dilemma: is this Parliament the beginning of the end, or the end of the beginning?

    CPS Interns George Bullard and Priyanka Surya welcome the OBR's Fiscal Sustainability Report


    Last month, George Osborne assured the House of Commons that the UK’s deficit reduction remained ‘on track’ and that the government was on course to meet its fiscal mandate (see graph below). Figures showed a greater than expected fall in total public sector net borrowing by £1.1billion in the month of May, resulting in the Chancellor’s plans being given the IMF’s stamp of approval.

     GDP chart

    But anyone who thinks that the end of this Parliament, and the closure of the structural deficit, marks the end of the UK’s fiscal woes should think again.

    The Office for Budget Responsibility this week published its first Fiscal Sustainability report, which painted a very pessimistic picture on the outlook for the UK’s finances.

    For the first time, they sought to examine off-balance sheet measures, the omission of which (as we argued in the Hidden Debt Bombshell) have masked the true scale of government liabilities in the past. Fundamentally, balance sheet measures have looked only at the impact of past government activity. They have not included the present value of future spending that we know future governments will wish to undertake, for example maintaining health, education and pension provisions.

    The report is therefore useful in that seeks to redress deficiencies of previous government analysis. Helpfully, it lays out in detail public sector pension and PFI obligations. But the report also examines future fiscal activity using long term projections of all public expenditure, revenues and other financial transactions - under the scenario of maintaining current policies.

    These 50 year predictions are based on the expectation that changes to UK demographics will be a significant source of long-term pressure on the state, with statistics drawing attention to a looming fiscal crisis driven by an ageing British population.

    The OBR report states that overall government expenditure, other than debt interest, is forecast to increase from 36.3% of GDP to 41.7% of GDP between 2015 and 2061 –thus, by £80 billion in today’s prices. The impact of the growing number of people over the retirement age, said to increase from 17% of the total population in 2011 to 26% in 2061, is evident - driving heightened costs in healthcare, state pensions and social care.

    Should policy decisions remain unaltered, the OBR warns that Private Sector Net Debt (PSND) will increase rapidly to a calamitous 107% of GDP by 2061. Furthermore, if the government were to increase spending in an attempt to combat the relatively weak productivity growth in the health service, PSND will exceed 200% of GDP by the late 2050s. The deficit which we have sought to eliminate in this Parliament would be running rampant once more: crowding out private investment and consumption, and slowing growth.

    The OBR recommends this be addressed by a permanent tax increase or spending cut of 1.5% of GDP in 2016-17, to prevent the expansion of the deficit and thus curb debt growth. To put this into context, the current ‘savage cuts’ of these next four years will lower the proportion of GDP taken up by spending by 4.6% - so the 2016/17 cut would be faster than any one year in the current plan.

    What we therefore require over the next decade is honesty from our political leaders about the challenges we face. The OBR’s transparent forecasting outlines that whilst George Osborne’s work in reducing the deficit today is welcome, in the future important long-term structural decisions must be made about the size and scope of state expenditure and tax. Given that international evidence suggests there is a limit to the extent a state can tax a population, we must surely look first to examine whether the scope of the state can be substantially reduced in areas where its intervention is unnecessary.

    Be the first to make a comment

    Centre for Policy Studies will not publish your email address or share it with anyone.

    Please note, for security reasons we read all comments before publishing.