Britain’s debt: The untold story

The true scale of Britain's national indebtedness was laid bare by the Office for National Statistics yesterday: almost £4 trillion, or £4,000bn, about four times higher than previously acknowledged.

It quantifies the burden that will be placed on future generations, and it is the ONS's first attempt to draw together the "off-balance-sheet" liabilities that have been accumulated by the state. The figures imply a huge "intergenerational transfer" – broadly in favour of today's "baby boomer" generation at the expense of younger people and future generations.

The debt primarily consists of the cost of public sector and state pensions, and of payments promised to private contractors under private finance initiatives. It far exceeds any of the figures so far published for the national debt, the largest current estimate for which is £903bn. That is projected to rise to £1.3trn by 2015.

If the current generation of taxpayers wanted to remove the higher bills facing their children and grandchildren, they would now be paying around 30 per cent more in tax.

The ONS data strengthens the Government's hand in its attempt to pull down state spending.

The ONS itemised the public sector's main liabilities as:

* Future payments for the state old age pension: £1.1trn to £1.4trn

* Unfunded public sector pensions for teachers, NHS staff and civil servants: £770bn to £1.2trn

* Payments under private finance initiative contracts: £200bn

* Contingent liabilities (eg bank deposit guarantees): £500bn

* Nuclear power plant decommissioning: £45bn

* Impact of financial sector interventions: £1trn to £1.5trn

Leaving aside the possibility of another financial meltdown that would leave the taxpayer with the liabilities of a substantial part of the banking system, the figures suggest that the realistic total liabilities of the public sector could be as much as £3.8trn (£3,800,000,000,000).

The ONS says that although much work remains to be done in constructing a comprehensive public sector "balance sheet" of assets and liabilities, it is clear that the current figure usually quoted – "public sector net debt", colloquially called "the national debt" – is "selective" and incomplete.

In research published alongside the ONS data, the National Institute of Economic and Social Research (NIESR) said that current taxpayers ought to be paying around 30 per cent more in tax to relieve future generations of that "unfair" burden. That also takes account of the additional health needs of the baby boomers as they reach their autumn years.

Failure to cut back now or raise taxes – and there is little sign of the population clamouring to make life easier for the as-yet-unborn – will leave future taxpayers with an additional burden of £200,000 each over their lifetimes to pay for the public services enjoyed by this and previous generations. Even with current plans to reduce the deficit, the tax bill would still be as high as £150,000 over the life of someone born in 2011.

Martin Weale, director of the NIESR said: "For spending to have simply carried on as from the 2008 Budget would have led to a very high burden on future generations or required a very large tax increase."

The baby boomers and their parents have also benefited from phenomena that are unlikely to be enjoyed by future generations, including: free university education, including maintenance grants; mortgage interest relief at the highest marginal rate of income tax; property booms that saw a massive transfer of wealth from the young to the old; free long-term care for the elderly; the proceeds of privatisations of state assets; and the demutualisation and distribution of reserves of the the former building societies and life offices.

The prospective bill for unfunded public sector pensions, such as those in the NHS, has risen sharply, from £450bn in 2004 to £770bn in 2008. The ONS says the Government would also be responsible for the deficits in other state schemes that are funded either by staff or the employers, such as those covering local authority employees. The deficit there is currently running at £27bn.

The annual bill for pensions to retired health, teaching staff and civil servants was £60.7bn in 2008, about double the schools budget. Pensions payments stood at £35.4bn in 1998. The rise is related to the improvement in public sector salary levels relative to the private sector and to the increase in the number of staff in the public sector.

However, the public sector is still solvent, to the tune of £317bn in 2008, according to the ONS, which is the difference between its liabilities and its assets, everything from foreign exchange reserves to shiny new hospitals.

Joe Grice, chief economist at the ONS, said that the public sector's net worth has fallen in 2008 for the first time since 1999, and that the figure for 2009 would probably be lower as well, given the scale of public borrowing. He added that "whole government accounting", a balance sheet for the public sector which has never previously been attempted, would be published from next year, analogous to a company's balance sheet. The figures would be prepared according to international accounting guidelines.

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