George Osborne’s decision to set up the Office for Budget Responsibility should rank as a bold success to all those who care about fiscal transparency and sustainability. The institution has today published its second Fiscal Sustainability Report, a superb innovation which not only paints a more accurate picture of the UK’s current public debt burden, but also sets out its likely path under unchanged policies (which really shows the challenges faced when a country’s population is ageing).
Readers of this blog will be unsurprised to know that the Report made pretty grim reading on our current plight.
Back in 2011, we set out how the official public debt severely understated the true public debts the UK faced, because it only looked at all liabilities accrued to date and liquid financial assets. It excluded future public service pension payments, PFI liabilities, and other provisions and contingent liabilities.
There have been debates between various organisations about what should and shouldn’t be included, but the OBR’s own calculations for the Whole of Government Accounts provide pretty similar numbers to our previous work for 2010/11.
They therefore estimate that the public sector’s total gross liabilities are £2442 billion, 157% of GDP or £99,239 per household – even before the liabilities undertaken by the public sector through the financial interventions in the banks, which the ONS suggest adds over £1000 billion to the official net debt figure (which is the figure we calculated before).
The overall net liability in the WGA – total gross liabilities minus total gross assets - was £1,195 billion or 77.2 per cent of GDP (excluding the interventions, which would take this to over 150% of GDP).
In other words – our situation is worse than the monthly ONS statistics suggest.
But the real insight of the report comes when examining the future direction of the Government finances on unchanged policies.
Assuming that taxes are uprated in line with earnings, non-age related departmental spending grows in line with nominal GDP, and that health output grows at the same rate as the economy (but due to lower productivity, costs more), the report estimates that on the central scenario, the primary deficit will increase by £65 billion by 2061/62 and after falling initially, public sector net debt will rise to 89% of GDP.
The scariest scenario was the forecast if productivity growth in health was weaker than expected, and the Government had therefore to increase spending on it by 3.6% per year in real terms. This would lead to an explosion of public debt without commensurate fiscal changes, such that it exceeds 200% of GDP by 2061/62.
Perhaps the most interesting scenario analysis, however, was that which varied whole economy productivity growth rates. Over the past 50 years, output per worker productivity has improved on average at 2.2% per year – so this value is used in the central projection.
As the chart above shows, the public sector net debt to GDP ratio is extremely sensitive to this productivity assumption. Low productivity growth = high and quickly increasing public debt.
That’s why it’s so frustrating that George Osborne’s Budget didn’t mention the ‘p’ word once. And why Nick Boles MP was right to say this week that Government spending decisions should increasingly be judged on whether they help or hinder economic competitiveness and worker productivity.