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Fiscal Sustainability Report

Volume 596: debated on Thursday 11 June 2015

Today the independent Office for Budget Responsibility (OBR) published its fifth fiscal sustainability report (FSR). This document meets its requirement to annually prepare an analysis of the sustainability of the public finances, and provides an important insight into the state of the public finances and the impact that demographic change will have.

The OBR also published the second welfare trends report (WTR). This report provides a transparent and independent analysis of welfare spending, in line with a request from the Chancellor in December 2013 to publish information on trends and drivers of welfare spending, and sources of error compared to the previous forecast.

The FSR was laid before Parliament earlier today and copies of both reports are available in the Vote Office and Printed Paper Office.

Changes since last year’s fiscal sustainability report do not change significantly the path of the long-term projections, with the FSR’s key conclusion reiterating that:

“longer-term spending pressures, if unaddressed, would put the public finances on an unsustainable path.”

As the OBR notes in its analysis, this is due to the spending pressure generated by an ageing population, which is projected to increase age-related spending by 3.9% of GDP from 2019-20 to 2064-65. Without additional policy change, the overall budget surpluses that are assumed to continue after this Parliament bring debt down to a low of 54% in the early 2030s, before being outweighed by age-related pressures that put debt back onto an upward trajectory. Debt reaches 87% of GDP in 2064-65 and is expected to continue rising thereafter. The report projects that tax revenues will remain at a relatively constant share of GDP from 2019-20 onwards, although in its detailed analysis of oil and gas revenues, it highlights the sharp scale of the decline in tax receipts from the North sea.

The Government take the sustainability challenge seriously. As life expectancy continues to increase, there is a need for a regular and structured way in which to consider changes to the state pension age in future. That is why the Government will carry out a regular review of state pension age every six years, starting in this Parliament. Details of the core principle to guide that review were set out alongside autumn statement 2013, including that people should expect to spend on average up to a third of their adult life in receipt of the state pension. The OBR projects that this would have a substantial positive impact on long-term fiscal sustainability, with state pension spending projected to be 0.8% of GDP lower by 2064-65 than if the state pension age had risen with currently legislated changes.

Reforms to the state pension come alongside the Government’s reforms to public service pensions, which will rebalance taxpayer and member contributions in the short term while ensuring costs are sustainable and fair in the long term. The previous Government implemented reforms to rebalance contribution costs between the taxpayer and the member, to change the uprating measure to CPI, and to reform the schemes’ designs in line with Lord Hutton’s recommendations. HM Treasury has estimated that these reforms will save more than £430 billion by 2061-62.

Spending on health rises from 6.2% of GDP in 2019-20 to 8.0% in 2064-65, as the population ages, with spending on social care rising from 1.2% to 2.2% over the same period. Given the particular spending pressures that arise in health and social care, including non-demographic factors, the Government are committed to ensuring that care services are as efficient and effective as possible. This includes funding the NHS’s own plan to deliver a modern, efficient and sustainable NHS and continuing to integrate health and social care services through policies such as the pooling of around £6 billion of health and care funding in Greater Manchester and the £5.3 billion Better Care Fund.

On the revenues side, the OBR have revised their oil and gas forecast down to £2.1 billion between 2020-21 and 2040-41 with companies’ net revenues expected to be low over the period. The OBR’s analysis clearly demonstrates the impact of falling production and cost escalation on the profitability of the sector—the onus is now on industry to make real improvements in these areas to improve their competitiveness. At Budget, the Chancellor introduced a radical package of reforms to support the sector, worth £1.3 billion, including reducing the headline tax rates and introducing a new investment allowance to reward companies investing in the UK continental shelf. This package is expected to lead to £4 billion of additional investment and an increase in production by 15% by 2019-20.

Recognising the scale of the long-term challenge, the Government are committed to ensuring that our public finances are put on, and remain on, a sustainable path for the long term. The OBR analysis makes it very clear that the Government’s medium-term fiscal consolidation plan is a vital step towards achieving long-term fiscal sustainability. This includes Government reforms to change the welfare system to ensure it promotes work and personal responsibility, while putting expenditure on a more sustainable footing.

Over the last Parliament, the Government halved the deficit from its post-war peak, but the deficit remains one of the highest in the developed world. This Parliament, the Government will complete the task of getting the public finances into surplus, so that we bear down on our excessive national debt, and begin to address the long-term challenges that we face.

The fiscal sustainability report and the welfare trends report published today are key examples of the great strides the OBR have taken in delivering greater transparency and credibility to our fiscal forecasts since its creation, five years ago. This Government remain committed to supporting the OBR in its role to provide independent and authoritative analysis of the UK’s public finances. The Chancellor has therefore asked Sir David Ramsden, Chief Economic Advisor to the Treasury, to complete a Treasury review on the existing regime and framework of the OBR including a focus on its role in enhancing UK fiscal credibility. The outcomes of the review will be published in the summer.

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