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Government needs extra £17bn in 2014-15 to meet debt reduction commitments.

Government needs extra £17bn in 2014-15 to meet debt reduction commitments.

New figures published recently by the Office for Budget Responsibility reveal the long-term pressures on the public finances caused by Britain’s ageing population and technological advances.

IPPR analysis quantifies the tough political choices on tax and spending needed to ensure that the public finances remain sustainable over the long-term and that key policy priorities can be delivered.

IPPR Senior Research Fellow, Kayte Lawton, said:

"An ageing population, technological progress in healthcare and growing national prosperity will, over the long-run, raise demand for some public services. Spending on healthcare and pensions will inevitably increase, raising the possibility of other areas being squeezed.

"But the collective provision of key public services – such as education and healthcare – remains the most cost effective and fair approach. The challenge for government is to find alternatives to cuts in state provision in these areas. This will necessarily involve identifying low-priority spending or tax-breaks that can be cut, and finding new sources of revenue such as road-user charging and taxes on wealth.

"These painful choices could be limited if the government can find ways of boosting productivity growth in the public sector – so that levels of provision can be maintained with fewer resources – and of boosting the growth of the economy more generally. Cutting beneficial forms of migration is also likely to be harmful to the public finances. Ultimately, the best way of ensuring a high level of provision of public services is by having a larger economy.

"This will require the government to prioritise spending in areas that will lift economic growth in the long-term. These include infrastructure investment, which supports growth in the private sector, and childcare, which enables a greater proportion of the population to work."

OBR projections show that government borrowing would start to rise from 2020 unless policy reforms are capable of raising additional revenues, cutting back on spending in some areas or substantially increasing the long-term growth rate. This would cause government debt to reach 89 per cent of GDP by 2061, regardless of how successful the current round of deficit reduction is.

IPPR analysis

New analysis from IPPR highlights the scale of the political decisions needed to ensure that public spending broadly matches revenues over the long-term:

  • The OBR expects debt to peak at 76.3 per cent of GDP in 2014-15. Simply maintaining debt at this level over the next half century would require the UK to maintain a small budget surplus each year until 2060. The UK has only achieved this in 24 out of the last 50 years.
  • Returning government debt to its pre-recession level of around 40 per cent of GDP would mean running a budget surplus of around 1 per cent of GDP each year to 2060. In 2014-15, this would imply permanent tax increases or spending cuts of around £17 billion in 2014-15, equivalent to an extra 4p on the basic rate of income tax or 15 per cent of the NHS budget.
  • An average annual growth rate of 3 per cent half the annual budget surplus needed to achieve to return debt to pre-recession levels by 2060. But achieving growth at this rate would be over a long period would be very tough and would require substantial upfront investment in infrastructure and services that support employment, like childcare.

IPPR argues that key to responding to the challenges identified by the OBR is to identify priorities for public spending, such as investment in childcare and social care – both of which support families to balance work and care. This is likely to require reforms to curtail spending in other areas, such as linking further increases in the state pension age to changes in life expectancy and new wealth taxes to pay for improved social care provision.

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