OBR in warning over £65bn hole

The Government must find £17 billion of additional spending cuts or tax hikes at the end of its current austerity plan or eventually face a £65 billion hole in the public finances, the official forecaster warned.

In its annual fiscal sustainability report, the Office for Budget Responsibility (OBR) said the additional £17 billion in savings by the year to April 2018 would be needed to get Britain's debt back to pre-crisis levels by 2061. The country's ageing population will increase the budget deficit by £65 billion if nothing is done, the OBR said.

This comes on top of George Osborne's £123 billion, seven-year fiscal consolidation programme, which includes hundreds of thousands of public sector job losses, an overhaul of the welfare system and a higher pension age.

Chief secretary to the Treasury Danny Alexander said the OBR analysis shows the Government's plans are "essential to restoring long-term sustainability in the public finances".

The ageing population is the key driver behind the pressure on public finances, as spending on healthcare and pensions increases, while dwindling tax revenues from sources such as North Sea oil interests could also have an impact.

The OBR report said: "In the absence of offsetting tax increases or spending cuts this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory.

"It is likely that such a path would lead to lower long-term economic growth and higher interest rates, exacerbating the fiscal problem. The UK, it should be said, is far from unique in facing such pressures."

The OBR said the budget balance, the difference between revenues and spending, is currently projected to move from a surplus of 1.7% of GDP in 2016-17 to a deficit of 2.6% of GDP in 2061-62. To maintain the surplus of 1.7%, a further £65 billion in spending cuts and/or tax hikes is needed. To avoid slipping into a budget deficit by 2061-62, or in other words to break even, the Government would need a further £39 billion in austerity measures.

In other measures, the OBR said the Government would need to impose a permanent tax increase or spending cut of £17 billion in the financial year 2017-18 to get debt back to pre-financial crisis levels of 40% of GDP.

The OBR said the main pressures on public finances come from age-related spending. Health spending is projected to rise from 6.8% of GDP in 2016-17 to 9.1% of GDP in 2061-62, rising smoothly as the population ages. State pension costs are projected to increase from 5.6% of GDP to 8.3% of GDP as the population structure ages and state second pension entitlements mature.