A further austerity programme half as large again as the current package of tax hikes and public-spending cuts will be required to prevent a Greek-style debt crisis from overtaking Britain in the coming years, according to the Office for Budget Responsibility (OBR), the independent body set up by the Government last year to oversee public finances.
Britain's ageing population – and especially the demands placed on the National Heath Service – is the biggest driver of the coming crisis, the OBR says. In its first report on the long-term (50 year) horizon for the national debt, the OBR says that Britain's public-sector net debt, more colloquially known as the national debt, stands at £906bn, some 60 per cent of national income, or £35,000 per household.
But the Government's total liabilities – including future commitments for pensions, health and social care, PFI projects, the nationalised banks and nuclear decommissioning – exceed £2trn, or about £80,000 per family.
On one of the OBR's more pessimistic projections, spending cuts and tax rises of about £50bn a year would be required to return the national debt to the levels prevailing before the financial crash in 2007-08. That compares with the £116bn fiscal squeeze the Government is planning to implement by the end of this Parliament and suggests further pain in the next parliament. If action is not taken, it says, the national debt is predicted to rise to 200 per cent of GDP, unsustainable on any assumption, and the fear of it would be sufficient to provoke a sovereign debt crisis.
If health-service spending is controlled through higher productivity, the planned squeeze on the rest of public spending will be less severe, but the OBR still has a central projection that implies a further £22bn of cuts and tax rises during the next parliament, suggesting little let-up in what promises to be a decade of austerity.
On public-sector pensions, the OBR says that the bill now stands at £1.1trn, or some 80 per cent of GDP, but the bill will decline in relation to the size of the economy, meaning it is not obviously by itself "unsustainable".
Liabilities arising from private finance initiative contracts were around £40bn – far above the £5.1bn previously revealed. Student loans are projected to add £63bn in today's terms to the net debt by the early 2030s.
Meanwhile, the Office for National Statistics reported a fall in unemployment of 26,000 in the three months to May, compared to a drop of 88,000 in the three months to April – a slackening in the rate of improvement.
The numbers claiming Jobseeker's Allowance rose for a fourth successive month to 1.5 million, some of which reflects reforms to the benefits system. Wage rises, at 2.4 per cent, remain well below inflation of 4.2 per cent.