Warning over public sector finances

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Indy Politics

Britain will effectively go bust if the Government does not offset the impact of an ageing population with increased taxes and spending cuts, an independent watchdog warned today.

The public finances will be set on an "unsustainable upward trajectory" as Britain's population lives for longer, the Office for Budget Responsibility warned in its first Fiscal Sustainability report.

Elsewhere, the OBR confirmed the net value of future public sector pension payments stood at £1.1 trillion in March 2010.

Public sector net debt stood at £906 billion, 60% of GDP or £35,000 per household, in March 2011, meaning the Government's total liabilities exceed £2 trillion.

The OBR warned that public sector net debt could hit 100% of GDP by 2058 as the increased life expectancy of Britons imposes a mounting strain.

The Whole Of Government Accounts, published by the Treasury alongside the OBR's report, have been billed as giving a fresh insight into the public finances, laying the situation out as a listed company would.

The OBR's report was designed to look beyond its current forecasts for public sector net debt, which go as far as 2013/14.

The OBR said net debt is forecast to rise from its current level of 66.1% to peak at 70.9% of GDP by 2013, before it will decline again.

But as the effects of an ageing population kick in, the net debt will once again start to rise from around 2030.

The £1.1 trillion pension bill in March 2010 - equal to 78.7% of GDP - was £331 billion higher than a year earlier, the OBR said.

Elsewhere, the report revealed liabilities arising from Private Finance Initiative contracts were around £40 billion - far above the £5.1 billion previously revealed.

There was a further £105 billion in provisions for potential future costs, which among other factors include the potential bill for nuclear decommissioning.

The main pressures of age-related spending are from health, state pension costs and social care costs.

Health spending will rise from 7.4% of GDP in 2015/16 to 9.8% of GDP in 2060/61, rising smoothly as the population ages, the OBR said.

State pension costs will increase from 5.5% of GDP to 7.9%, while social care costs will rise from 1.2% of GDP in 2015/16 to 2% in 2060/61.

The OBR also highlighted the impact the new student financial support arrangements announced in December 2010 will have on national debt.

Student loans are projected to add £63 billion in today's terms to the net debt by the early 2030s but will fall to £49 billion by 2060 as the value of loan repayments rises.

The report stated that if stakes in state-backed banks - including Northern Rock, Royal Bank of Scotland and Lloyds Banking Group - were sold at current market prices, they would generate a loss of £13.5 billion.

The OBR added: "Needless to say, while our remit is to look at the fiscal challenges of an ageing population, the fact that people are living longer - and longer in good health - is clearly something that society should welcome."

Michelle Mitchell, Age UK charity director, formed by a merger of Age Concern and Help The Aged, said the country has time to make long-term plans.

Ms Mitchell said: "Longer life is a cause for celebration, but it will require economic adjustments."

She went on: "Relative to the size of the economy, it is inevitable that we will see increased pension payments and consumption of health and care.

"But it is for us, as a society, to choose the balance between public and private provision and what this should mean for tax and spend.

"There is no evidence that the public wishes to see entitlements in later life reduce, when people have contributed for all their lives.

"If we plan sensibly and carefully calibrate long-term spending and taxation decisions, there is no need for national debt to increase alongside life expectancy."