OBR: Public finances are “on an unsustainable path”

Government's spending watchdog warns that increases in health spending and pressures of an ageing population mean more budget cuts or tax rises will be needed to balance public finances

By Civil Service World

18 Jan 2017

New projections from the Office for Budget Responsibility suggest chancellor Phillip Hammond will not be able to balance the budget  by  the 2025-26 financial year unless he cuts public spending or raises taxes.

The Chancellor has already rowed back on predecessor George Osborne's target of a surplus by the end of the current Parliament, saying he would eliminate the deficit by the end of the next parliament.​

The OBR's forecasts, published on Tuesday, suggest the deficit will rise from 0.7% of GDP in 2020-21, to 1.8% by the end of the next Parliament, although that does not take account of further tax rises and spending cuts the Government might bring in. 

It also remains to be seen what impact the final Brexit agreement will have on the public finances.

The main causes for the fiscal deterioration are a rise in health costs, along with increased spending on the state pension and social care. 

Health spending alone is projected to rise 0.6% in the next Parliament due to a combination of demographic pressures from an ageing population and an increase in other costs. 

At the same time, the OBR says the Government has scope to improve the fiscal picture by making changes to the taxation and welfare systems.

One example would be to end the triple-lock on the state pension, which currently sees payouts rise by whichever is lowest of average earnings, inflation or 2.5%.

Another option would be for working age welfare payments and tax credits to increase in line with CPI inflation instead of average earnings - a step which is projected to bring down spending by 0.3% of GDP.

Shadow Chancellor John McDonnell claimedthe forecast was an indictment of Tory economic policy since 2010.

“Today’s OBR report on fiscal sustainability lays bare the reality of six years of Tory economic failure," he said in a statement.

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