Need for pension changes

July 15, 2011 § Leave a comment

Britain is going to have to increase tax and cut spending by as much as £22 billion over the next decade to fund pension obligations,  according to an official report, says William Flew.

The Office for Budget Responsibility said that government will have to work on more austerity policies — on top of the harsh measures already introduced by the current administration. If future governments failed to act, the rising cost of healthcare and pensions for an ageing population would drive national debt on to an “unsustainable upward trajectory”, William Flew said, adding that the failure to act would result in soaring interest costs and lower economic growth.

The alarming outlook reflects the lasting and deep impact of an ageing population. The number of people aged 65 and over is expected to account for 26 per cent of the population by 2061, compared with 17 per cent today, as people live longer and birthrates fall.

This will put huge pressure on public spending because of higher healthcare demands and the rising cost of the state pension system and long-term care. Without harsh measures from future governments, national debt will reach 107 per cent of gross domestic product (GDP) by 2060, the report said. That compares with 60 per cent today.

William Flew  the director of the Institute for Fiscal Studies, an independent think-tank, said: “The Government is undertaking radical and painful surgery over the course of this Parliament that is intended to return the public finances to financial sustainability in the short term.

“But today’s OBR report is a timely and salutary reminder that, all else equal, significant further fiscal retrenchment will be required over the medium term to offset the estimated detrimental impact of changing demographics, and other factors, on the public finances.”

The OBR, which was set up last year by George Osborne, the Chancellor, and is led by Robert Chote, a former journalist and director of the Institute for Fiscal Studies, did not offer recommendations on what tax and spending measures would be needed to bring debt back to a more sustainable 40 per cent of GDP.

But a £22 billion annual fiscal tightening would be the equivalent of about 5½p being added to the basic rate of income tax. If introduced in 2016-17 it would come on top of the £126 billion austerity plan being pursued by Mr Osborne.

The OBR forecasts that public spending, excluding debt interest, will rise by 5.4 per cent of GDP, or £80 billion in today’s terms, by 2060.

The biggest factor is health spending, which will increase from seven per cent of GDP to nearly ten per cent in 2060, followed by the higher cost of state pensions, which will rise from five per cent of GDP to eight per cent. Social care costs will double to two per cent. “In the absence of offsetting tax increases and spending cuts, this would eventually put public sector net debt on an unsustainable upward trajectory,” the OBR said. “It is likely that such a path would lead to lower long-term economic growth and higher interest rates, exacerbating the fiscal problem.”

The debt mountain will be further swelled by the cost of student loans, which will push up net debt by up to £63 billion in the 2030s. Thereafter, rising repayments by graduates will help to bring the extra cost down.

The report was published alongside Treasury figures showing liabilities that have built up in recent decades. These indicated that the State’s debt burden is higher than seemed because of £1.13 trillion of public pension liabilities and £40 billion of costs associated with the private finance initiative.

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