OBR Fiscal Sustainability Report makes grim reading for anyone concerned about future generations

David Kingman reports on the 2014 edition of the Office for Budget Responsibility’s Fiscal Sustainability Report, which quantified the long-term liabilities we are leaving to future citizensAged persons warning sign

Future generations will face an exploding national debt as the UK’s population ages, according to the latest projections from the Office for Budget Responsibility. The politically-neutral body, published the 2014 edition of its annual Fiscal Sustainability Report on 10 July, which quantified the scale of the debts that we leaving future generations to pay off.

Ageing population to cost £79 billion

One of the key themes which this year’s Fiscal Sustainability Report focused on was the projected impacts of population ageing on Britain’s economy in the future. The OBR argued that this will lead to a very significant increase in total public spending over the next 50 years; overall, they think the total cost of providing public services will rise from 34.3% of GDP in 2018/19 to 39.1% in five decades’ time, which is the equivalent of £79 billion in today’s money. Most of this increase will be driven by increased spending on pensions, the NHS and adult social care which will largely come about because of Britain’s ageing population.

This increase in public spending will lead to a rise in the national debt: the OBR foresees this rising from 79% of GDP next year to 84% by 2063/4, although it should decline in the medium-term before it expands again. It is also worth bearing in mind that all of these projections which look at costs as a share of GDP are based on growth averaging 2.2% per year over the next 50 years. This has been the long-run average rate over the previous half century, but it is clearly uncertain whether this pace can be repeated (some economists have argued that ageing populations may act as a drag on productivity, for example).

How we will pay for the pensions and healthcare which have been promised to the retired generation if growth disappoints is a problem which we are largely guilty of leaving to the future to sort out.

Unfunded liabilities

The OBR also provided the latest estimates of the scale of the UK’s unfunded financial liabilities. These are eye-wateringly large: the National Debt is worth £1.3 trillion (£48,200 per household), and then there are another £1.2 trillion worth of public sector pension liabilities which are completely unfunded, meaning the pensions have been promised without any money being put aside to pay for them. Alongside these are some other smaller, but still significant, burdens, such as £37 billion for Public Finance Initiative (PFI) contracts and the £131 billion which has been forecast for energy decommissioning (this mainly represents the cost of cleaning-up Britain’s old nuclear reactors as they come off-line).

Even some sources of future liabilities which might seem relatively small-scale can add up to impressive amounts over the longer term. Following the 2012 reforms to higher education in England, which will see students being loaned much larger amounts by the government to help them meet the cost of their studies, the OBR now estimates that tuition fees will have added 10% to the total public sector debt by the mid-2030s (this is the point when repayments from graduates are supposed to reach a high enough level for the debt to begin to fall, but the amount which the government expects to recoup has already needed to be revised downwards several times).

The OBR report also drew attention to two specific ways in which today’s younger generation will be worse-off over the long-term. Firstly, they credit the increase in the state pension age with improving Britain’s debt position over the coming years from what it would have been otherwise, but they also confirmed that the changes which have been implemented mean state pension age will rise to 70, and beyond, for today’s young people, while saving the current older generation from bearing the brunt of any changes.

Secondly, the OBR also made a long-term projection that increase in average wages will continue to lag behind growth in house prices for years to come, baring a miraculous turnaround in house-building to levels not seen since the 1960s. Unfortunately, this will inevitably restrict access to housing for would-be first-time buyers to an even greater extent than is the case at present, holding back the growth of property-ownership which their parents’ generation was able to enjoy.

Overall, the OBR report makes grim reading for anyone who is concerned about future generations, as they seem destined to carry the can for the mistakes made by our short-termist policymakers today.