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11.07.14

Ageing population putting pressure on public spending – OBR

Tax increases or further spending cuts will be needed in the future to help meet the costs of the UK’s ageing population, the financial watchdog has warned. 

Projections from the Office for Budget Responsibility (OBR) have revealed that population ageing will put upward pressure on public spending. 

Within its Fiscal sustainability report – July 2014 report, the OBR has forecast that spending, excluding debt interest, will rise from 34.3% of GDP at the end of its medium-term forecast in 2018-19, to 39.3% by 2059-60, before falling slightly to 39.1% of GDP in 2063-64. That would represent an overall increase of 4.8% of GDP or £79bn in today’s terms. 

The main drivers for this are spending on health, state pensions and long-term care, according to the watchdog. Robert Chote, chairman of the OBR, said: “In the absence of any policy measures, things would have got worse, for two main reasons. First, the new population projections are less favourable – a smaller working population relative to the young and old. 

“And second, the structural budget balance at the end of the medium term forecast would be slightly worse – in part because we expect to get less tax revenue per pound of economic activity than we did a year ago. 

“The position looks slightly better than it did last year. The population projections and the medium term forecast are less favourable, but this is more than offset by the decisions to announce an additional year of spending cuts and to link the State Pension age to life expectancy.” 

According to OBR, gross liabilities of the government climbed significantly during 2012-13, rising by £276bn to £2.893 trillion, an increase of nearly a tenth. Most of the increase was attributed to a hike in the expected value of future public sector pension payments, which rose by £166bn to £1.172 trillion. 

Philip Booth, editorial and programme director at the Institute of Economic Affairs, said: “This report shows the severe difficulties governments will face over the coming decades resulting from the promises made via the post-war welfare state. 

“The triple lock on the state pension and the abolition of contracting out of state pension schemes are two further policies which worsen the long-term fiscal outlook. If the government is serious about our long-term fiscal health, the ring-fence on healthcare spending should be removed and policy should promote private provision and pre-funding of healthcare and retirement incomes.” 

The OBR also forecasts that the state pension age will reach 70 for the first time by 2064. It is currently 65 for men and 60 for women. 

It found that without the measures, Britain's debt would also be £1.14 trillion higher in the next 50 years as the economy struggles to cope with a huge rise in the number of pensioners and the decline in the number of people working. 

However, chancellor George Osborne said: “The report from the OBR provides further evidence that the Government's long-term economic plan is working and the country's hard work is paying off. 

“It shows that as a result of the decisions we have taken over the past year, in the next 50 years, debt as a share of our national income will be two thirds lower than it would have been.” 

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