National debt to rise without further cuts, says report

The OBR, set up by chancellor George Osborne, has challenged future governments to reduce national debt to 40% of GDP. Photograph: Chris Radburn/PA

Rising health, pension and social care costs connected to Britain's ageing population will put the public finances on an unsustainable footing in the coming decades without radical action, according to a report from the independent Office for Budget Responsibility.

Future governments would have to cut spending or increase taxes by ?19bn in 2018 - on top of the current ?153bn squeeze ? if they are to reduce the long-term level of national debt to 40% of GDP ? the figure widely considered "sustainable".

The ?19bn requirement is equivalent to 1.2% of GDP, or more than 4p on the basic rate of income tax.

Without a fresh round of tax rises or spending cuts, coupled with a significant rise in immigration, the debt-to-GDP ratio will be on an ever-rising path, according to the OBR's report released on Wednesday.

Health spending will become one of the biggest extra burdens on the public purse as people live longer and the health service becomes capable of dealing with more complex needs, said the Treasury's independent watchdog.

Only a few days ago NHS boss Sir David Nicholson said a "fundamental rethink" of health service provision was necessary to avoid a ?30bn funding gap by 2021. The OBR report warns that health provision could need more than ?50bn a year extra by 2062 unless productivity levels are boosted.

Higher levels of immigration will help limit the rise in debts to 99% of national income by 2062, the OBR said, but the debt level could be kept below 80% if 140,000 extra immigrants a year are let in over the next five decades.

Immigrants provide a boost to the economy because they tend to arrive as adults. While their children need education and health services, they spend the majority of their time working and paying tax, says the report.

The OBR, chaired by the economist Robert Chote, was set up by George Osborne to provide an independent check on Treasury forecasts, and part of its remit is to produce an annual long-term assessment of tax and spending trends.

The OBR believes the outlook for the public finances will deteriorate in the medium-term largely because of Britain's ageing society, as the "baby boomer" generation retires, and a larger proportion of the population draws the state pension and relies on the NHS and social care services.

It expects health spending to increase from 7% of GDP in 2017-18, to 8.8% of GDP in 2062-3; and the costs of the state pension to rise from 5.8% of GDP to 8.4% over the same period ? though that is lower than the OBR's estimate last year, because of the government's recent announcement of a simpler, and slightly cheaper, "single tier" pension.

Collapsing tax receipts from North Sea oil, as production declines, are also expected to contribute to the worsening fiscal outlook. The OBR has carried out new forecasts, and finds that revenues are expected to decline, from 0.7% of GDP in 2011-12, to a negligible 0.03% of GDP over the next 20 years.

Source: http://www.guardian.co.uk/money/2013/jul/17/national-debt-cuts-tax-increases

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