Britain faces decades of rising public sector debt, increasing taxes and, potentially, falling living standards unless it tackles the growing costs of its pensions and health bill, the Treasury will warn this week.
In a paper to be printed alongside the pre-Budget report (PBR), the Treasury will warn that the costs of paying for state pensions and the National Health Service are set to rocket between now and 2059 unless action is taken to reduce the bill.
The paper on long-term fiscal challenges, which will accompany the shorter-term forecasts in the PBR, is intended to focus politicians from both parties on the risks faced by Britain unless they contemplate radical actions such as increasing the retirement age or cutting back on free healthcare provision.
Although the paper is likely to be over-shadowed by the PBR, in which the Chancellor is expected to accompany broadly unchanged spending plans with new taxes on the wealthy, it will sketch out a worrying picture for Britain’s fiscal future.
It will warn that, although fertility rates in Britain are significantly better than those in most of the developed world, the costs of an ageing population will more than offset any extra revenue generated in the future years.
When superimposed on top of the debt caused by the recent financial and economic crisis, which amounts to about 50 per cent of gross domestic product, the long-term demographic costs will push Britain’s national debt to worrying levels unless addressed.
The report will shy away from explicit forecasts on the extent to which Britain’s national debt burden will rise steeply over the next 50 years, in part because most who have tried to project the impact of higher life expectancy and lower birth rates have generated incredibly high figures.
Earlier this year, the European Commission forecast that unless action was taken to cut state pension costs and healthcare bills, UK public debt would rise from around 60pc of gross domestic product (GDP) this year to 160pc by 2020, 406pc by 2040, and 760pc by 2060. The Treasury attacked such figures as having “no basis in reality”, and is likely to use its Long-Term Fiscal Projections document as a rejoinder.
However, the long-term threat will do little to prevent the Chancellor, Alistair Darling, unveiling a pre-Budget report which is set to contain fiscal plans which are no more ambitious than those laid out in the Budget in April. At that point, the Chancellor pledged to reduce annual government borrowing from 12.4pc of GDP this year to 5.5pc of GDP in 2013/14. Since then, however, a variety of authorities, including the International Monetary Fund, the Organisation for Economic Co-operation and Development and a range of ratings agencies, have warned that the Budget plans did not go far enough.
According to Philip Shaw, chief economist at Investec, the possibility that the election next year could result in a hung parliament will make the markets more worried still about the lack of Government action in reducing the deficit.
“In an ideal world, markets would prefer a significant fiscal tightening,” he said.
However, the Chancellor is likely to pitch the PBR not as a package of austerity measures but as a continuation of its efforts to prevent Britain from lurching into a full-blown depression.
He will warn that Britain remains vulnerable if there are any further Dubai-style shocks to the economic system. As a result, he will maintain that it would be foolhardy to try to reduce the deficit by any more than is slated in the Budget
This claim is likely to be attacked by the Conservatives, as will be Mr Darling’s decision to cut his growth forecast this year to -4.75pc, and his restatement of next year’s forecast of 1.25pc.
However, the PBR will be framed inside Labour circles as a pre-election trap for the Conservatives. Alongside the PBR, Mr Darling will commit to the new Fiscal Responsibility Bill, which will make it a legal obligation to reduce the deficit to 5.5pc within four years.
Labour insiders hope that, by spelling out this cut and giving signs about how it will go about reaching it, the Government will then be in a position to insist that the Tories would be forced either to commit to the plan or to spell out how they would go further. As such, Labour strategists hope to paint the Tories either as shallow, without policies, or as overly-austere spending cutters.
According to Michael Saunders, chief European economist at Citigroup, the Treasury’s refusal to present a deeper set of cuts could cause shudders of dismay in the markets, and provoke disapproval from the credit ratings agencies who determine the grading of government debt.
According to a range of experts at Morgan Stanley, UBS and beyond, Britain is at tangible risk of a fiscal crisis if it fails to tackle its deficit.
In the longer term, it faces another black hole altogether caused by the demographics described by the Treasury’s own report.
By Edmund Conway
Published: 9:20PM GMT 05 Dec 2009
Source: The Telegraph