Ageing UK population will increase strain on public spending, OBR warns

The financial cost of Britain’s ageing population will require a fresh £20bn wave of spending cuts or tax increases from 2020 to bring the national debt back to pre-recession levels in 50 years time, the government’s public finances watchdog has said.

Long-term projections by the Office for Budget Responsibility show that the second round of austerity due to be detailed by George Osborne in next month’s budget will not be sufficient to reduce debt to 40% of national income – its level before the economy entered its deepest postwar slump.

The OBR said that by 2065, 26% of the population of England and Wales would be more than 65 years old, up from 18% today, increasing the cost of pensions, health and social care.

“Our central projections show that population ageing will put upward pressure on public spending”, the OBR said in its annual fiscal sustainability report. It added that spending would rise as a share of national income while tax receipts would remain flat.

As a result, the government’s primary balance – the gap between its revenues and its spending excluding debt interest payments – would move from a surplus of 2.1% of GDP in 2019-20 to a rough balance by the mid-2030s and then to a deficit of 1.9% of GDP by 2064-65.

The OBR said that if left unaddressed, ageing would put increasing pressure on the public finances. The national debt would come down from its current 80% of GDP to 54% by the early 2030s and then start rising again, reaching 87% of GDP in 50 years time.

“Beyond this point, debt would remain on a rising path,” the OBR said. “A once-and-for-all policy tightening of 1.1% of GDP in 2020-21 [£20bn in today’s terms] would see the debt ratio reach 40% of GDP in 2064-5.”

The OBR added that even a further £20bn of belt-tightening would not be enough to prevent debt rising beyond 2064-5. For this, there would need to be spending cuts or tax increases worth 1.9% of GDP - around £35bn in today’s terms.

The chancellor will use the OBR’s report to support his case for making it unlawful for any government to run a budget deficit apart from in abnormal circumstances, since the national debt would eventually be eradicated if revenues permanently exceeded spending.

The Treasury said: “Our deficit is less than half what it was, but [today’s] report from the OBR clearly shows the hard work that needs to be done to fix the public finances and deliver economic security and prosperity for working people. We have learned there is no shortcut to dealing with our deficit, which is why we need to roll up our sleeves and continue working through the plan to return the public finances to surplus.”

Robert Chote, the OBR’s director, said it was up to Osborne to specify what constituted normal times. “It is not for us to decide under what circumstances it would be right to run a budget deficit,” he said.

The OBR provides half-yearly economic and financial forecasts for the Treasury, and Chote said: “I don’t want to have discussions with the Treasury twice a year about what ‘normal’ means.”