July 13 (Bloomberg) -- Britain’s long-term public finances are on an unsustainable path without tax increases or spending cuts as an ageing population boosts expenditure on health, care and pensions, the government’s fiscal watchdog said.
Governments will need to tighten fiscal policy after March 2017 by 3 percent of gross domestic product, the Office for Budget Responsibility said. Chairman Robert Chote said the report doesn’t require a policy response from the current government.
“Nothing we say today should be construed as a call for a bigger fiscal tightening over the next four years,” Chote told reporters in London today. “But an ageing population does have fiscal costs.”
The absence of tighter policy would push Britain’s net debt above 100 percent of economic output by about 2058 from 66 percent this year, the OBR said.
Chancellor of the Exchequer George Osborne’s program of cuts won’t be enough to keep the deficit from increasing again after 2015, with health-care costs projected to increase to 9.8 percent of economic output by 2061 from 7.4 percent in 2016, the OBR said.
Long-term care for the elderly will increase to 2 percent of GDP from 1.3 percent in 2016 and state-pension costs will rise to 7.9 percent from 5.5 percent, it projected.
Spending on education will remain at about 5 percent of GDP during that same period while spending on pensions for public-sector workers will drop to 1.4 percent of output from 2 percent in 2016. The government says it is reducing those pensions because they have become unaffordable.
The Treasury today published figures showing that Britain’s public-sector pension liabilities reached 1.1 trillion pounds ($1.75 trillion) last year.
The estimates, which aim to replicate accounting standards used by large publicly traded companies, show that pension liabilities of the public workforce reached about 80 percent of gross domestic product in the fiscal year that ended in March 2010. Existing accounting methods put that liability at 770 billion pounds in the 2008 fiscal year.
“Almost 260 billion of this increase had nothing to do with the prospective size of public-service pension payments,” Chote said. “Instead, it reflected a fall in the so-called discount rate used to convert the flow of future payments into an upfront sum. Next year the discount rate will rise, pushing the liability back down again.”
The new accounts also show that Britain has liabilities of 40 billion pounds from private finance initiative projects. Previous accounts showed that liability was 5 billion pounds.
--Editors: Andrew Atkinson, Craig Stirling
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