The Office for Budget Responsibility (OBR) has today published its sixth fiscal sustainability report (FSR), fulfilling its legal obligation to publish an analysis of the sustainability of the long-term public finances and an assessment of the public sector balance sheet at least once every two years. The report was laid before Parliament earlier today and copies are available in the Vote Office and Printed Paper Office.
The FSR provides us with insight into how long-term economic and demographic trends, including our ageing population, are likely to impact the public finances over the next half century, without mitigating action. These long run projections are based on OBR assumptions of unchanged policy beyond the medium-term horizon. They are therefore not the OBR’s predictions of what will happen—but an illustrative projection of what may happen, if the Government did not take action.
In producing these projections the OBR must make stylised assumptions, and as they note, many of these assumptions are subject to a high degree of uncertainty. The results are highly sensitive to these assumptions, and this is particularly the case over the 50 year horizon in the FSR. For example, the OBR project that debt to GDP by 2066-67 could be between 40% of GDP higher or 101% of GDP lower than the central projection, depending on which assumptions are used to underpin projected growth in healthcare spending.
Their findings must be interpreted in this context. However, the FSR’s underlying conclusion is clear: fiscal sustainability will come under increasing pressure from both demographic change and the need to improve efficiency and productivity over the next 50 years. It is important that action continues to be taken to address demographic pressures and improve efficiency, particularly in the health sector.
While the FSR’s fundamental message is unchanged from previous reports, changes to the assumptions underpinning this year’s projections drive higher projected spending than in previous reports. Higher projected spending, alongside higher initial borrowing and debt, feeds through, in turn, to higher projected borrowing and debt by the end of the projections.
In terms of specifics, the FSR projects that spending on the state pension will rise from 5.0% of GDP in 2021-22 to 7.1% of GDP by 2066-67, putting significant pressure on taxpayers. To ensure that the state pension remains sustainable and fair across generations, the Government are carrying out their first review of state pension age. The Government will consider all the evidence—including an independent report by John Cridland—before formally responding by publishing their review by 7 May 2017.
The FSR also projects that health spending will rise from 6.9% of GDP in 2021-22 to 12.6% of GDP in 2066-67, due to the inclusion of non-demographic cost pressures in the OBR’s analysis for the first time. As the OBR note, there is significant uncertainty around this long-term projection, and it does not take into account the impact of any Government action to address projected cost pressures in future Parliaments. We are taking steps over this Parliament to improve the efficiency of the NHS. This includes funding for the NHS’s five year forward view plan, which sets out its vision for a sustainable long-term future for the NHS, and its proposals for reforms to help it meet future challenges. Decisions on funding in the longer term will be for future Governments to take.
Overall, the FSR demonstrates that the situation would be far graver without the significant progress made by this Government since 2010. The deficit the Government inherited in 2010 stood at 10% of GDP. We have now brought down the deficit by almost two-thirds of GDP and, by 2021-22, the OBR forecast that borrowing will have fallen to its lowest level in two decades. In 2018-19, the OBR forecast debt to fall as a share of GDP for the first time since 2000-01. The magnitude of the long-term fiscal sustainability challenge faced by the UK is similar to many other advanced economies, according to international institutions. Debt is projected to reach 141% of GDP in the US by 2046, and could reach over 180% of GDP in Germany by 2060. This compares to about 125% of GDP in the UK by 2046-47 and rising to about 200% of GDP by 2060-61 as projected in this year’s FSR.
Nonetheless, despite significant progress made to repair the public finances since 2010, today’s OBR projections suggest that, without further policy change, debt will reach over 234% of GDP by 2066-67 and continue on its upwards trajectory thereafter, driven by increased age-related spending.
Clearly, this would not be a responsible course of action. This provides the motivation for the fiscal framework that the Government set out at autumn statement 2016. We must continue to reduce the deficit and get debt falling over the medium term. And we must bring the public finances to balance at the earliest possible date in the next Parliament. The debate and vote on the new fiscal framework will take place next week, enshrining these commitments to fiscal responsibility into law.
As we look towards the next Parliament, ensuring that the public finances remain sustainable will continue to be one of this Government’s key priorities. In consideration of this fact, at autumn statement 2016, the Chancellor announced his intention to review public spending priorities and other commitments for the next Parliament in light of the evolving fiscal position at the next spending review. Fiscal discipline today will help us tackle any future economic shocks and reduce the burden of debt on future generations. Increasing life-expectancies and other economic trends will continue to pose challenges for the public finances. In response, we will continue to control public spending and grow the potential of the UK economy, including by targeting increased investment in infrastructure to increase the UK’s long run productivity challenge.
The FSR is yet another important example of the credibility and transparency that the independent OBR brings to the public finances, as recognised recently by the IMF’s fiscal transparency evaluation.