OBR warns ageing will put public finances under pressure

12 Jun 15

The public finances will be put under pressure over the next 50 years due to the ageing population, the government has been warned, with demand for healthcare and pensions set to increase spending by £79bn.

In its annual Fiscal sustainability report, the Office for Budget Responsibility said that although the government’s deficit reduction plans indicate the public finances would show a surplus of 2.1% of gross domestic product in 2019/20, the additional costs mean deficits would return in the mid-2030s.

Based on current policy projections, the government would then run deficits every year from then until the end of the forecast period in 2064/65. This amounts to an overall deterioration of 4% of GDP, or £79bn in today’s terms.

The forecast comes despite Chancellor George Osborne’s plan to commit future governments to balanced budgets.

This swing predicted by the OBR is based on increased health spending from 6.2% of GDP in 2019/20 to 8% in 2064/65, as well as an increase in state pension costs by 2.3 percentage points to 7.3% of GDP in 2064/65.

Over the same period, social care costs will nearly double from 1.2% of GDP in 2019/20 to 2.2%. This includes the forecast spending from a cap on an individual’s lifetime social care costs, which will see the government pay beyond £72,000.

The report stated the deficits would occur because the cost increases will not be matched by higher revenues.

“Under our definition of unchanged policy, the government would end up having to spend more as a share of national income on age-related items such as pensions and health care, but the same demographic trends would leave government revenues roughly stable.”

It has also been forecast that tax revenues from North Sea oil will continue to fall, from £2.6bn in 2014/15 to a projected £700m in 2019/20. This compares to a recent peak of just under £11bn in 2011/12.

“North Sea oil and gas production has fallen each year since 2000, by 7.8% a year on average,” the report concluded. “The rate of decline eased last year, with a fall of just 0.9%. Our central forecast is for production to decline more gradually than the long-term trend between 2014 and 2019, reflecting the expected returns from high levels of investment in recent years.”

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