Looking at how assets and liabilities on the public sector’s balance sheet are expected to change over time provides an important picture of the direction of travel when it comes to government activities. The Office for Budget Responsibility’s (OBR) latest report sounds alarm bells for mounting spending challenges ahead.
The Fiscal Sustainability Report, released by the OBR on Tuesday, sets out the long-term sustainability of the level of public debt. This is a key measure of the government's fiscal policies, which since 2010 have involved reducing government spending with the aim of reducing the net debt level – polices we collectively refer to as austerity.
Before looking at some of the key points in the report, it is worth understanding that long-term projections here are based on revenue, spending and financial transactions on an assumption of ‘unchanged policy’. It also assumes no impact of things that are at this point unclear, for example the impact of Brexit on public finances beyond what has previously been incorporated into OBR projections. The report does however, factor in the recent announcements on increased funding for the NHS.
According to the report, the position on public finances is worse than previously estimated in the OBR’s last fiscal sustainability report.
Key forecasts indicate that health spending will rise from 7.6% of GDP in 2022-23 to 13.8% in 2067-68, largely due to a combination of demographic changes and cost pressures in the sector. Over the same period, state pension costs increase from 5.0% of GDP to 6.9%, impacted by aging population and the pension triple lock, which will raise average awards relative to earnings across the whole economy. Similarly, adult social care costs rise from 1.3% of GDP in 2022-23 to 1.9% in 2067-68.
There are of course a number of other factors involved, relating to financial transactions and other, but taking all of that into account the impact on the public sector net debt (PSND) position is stark.
PSND is projected to fall from its medium-term peak of 85.6% of gross domestic product in 2017-18 to 80% of GDP in 2022-23, before rising thereafter and reaching 282.8% of GDP in 2067-68. Beyond this point, the OBR report suggests debt would continue to rise, all of which points to a clearly unsustainable path.
Putting some numbers on this from the Whole of Government Accounts recently published by Treasury, overall net liabilities was £2,421bn or 122% of GDP at the end of March 2017. This was up £435bn on the previous year’s restated results. The rise in PSND within those total liabilities was £124bn going up to £1,727bn. A key reason underpinning the rise in WGA liabilities is the impact of lower long-term discount rates on the public service pensions liability, which raises the level of the current value of those discounted future liabilities on the balance sheet.
So what about the Brexit dividend to pay for the NHS increased funding? There's no good news here either. The OBR have estimated that the UK would have had to make a contribution of £13.3bn to the EU budget in 2022-23 if we remained a member, but of that potential saving, £7.5bn will be absorbed by the withdrawal settlement payment expected for that year, leaving £5.8bn available to spend. This could cover slightly less than 30% of the cost of the health package in that year, but it does not factor in any other calls on these potential savings, including commitments the government has already made on farm support, structural funds, science and access to regulatory bodies.
What is clear from the core messages in the report is that the current path of public finances is not sustainable. Policy and practice needs to change to support productivity and growth measures over a longer-term planning timeframe, alongside a clear focus on outcomes that can be delivered across government in a more sustainable way. Planning for those policy changes needs to start now as this position is not something that can be turned around in a short time frame.