Fiscal Sustainability

Wednesday 17th July 2013 Written Statements

[The Chief Secretary to the Treasury (Danny Alexander)]

Today the independent Office for Budget Responsibility (OBR) published its third fiscal sustainability report (FSR). This document meets its requirement to prepare an analysis of the sustainability of the public finances each financial year, and provides an important insight into the state of the public finances taking into account the significant impact of demographic change. The report was laid before Parliament earlier today and copies are available in the Vote Office and Printed Paper Office.

The OBR/FSR projections show that public sector net debt is expected to fall to a trough of 66% of GDP in the early 2030s, before rising to reach 99% of GDP in 2062-63 in the absence of further policy change. The FSR shows that, without additional policy change, an ageing population is projected to increase age-related spending by 4.4% of GDP between 2017-18 and 2062-63, as health, social care and pension expenditure become an ever larger proportion of total public spending and the economy.

The FSR also examines the long-term sustainability of Government revenues. As in previous years, the OBR projects that oil and gas revenues will decline markedly over the coming decades. Updated projections show revenues declining from 0.4% of GDP this year to 0.03% of GDP in 2040-41, with total revenues over the projection period revised down by £11 billion. The OBR consider the impact of alternative scenarios for oil and gas prices and for production and conclude that revenues will fall below 0.1% of GDP in the coming decades, even in these more optimistic scenarios.

The Government are committed both to strengthening our fiscal position now and making it sustainable for the long term. The OBR analysis makes it clear that the Government’s medium-term consolidation plan is essential to restoring long-term sustainability of the public finances. A deterioration in the primary balance in 2017-18 worth 1% of GDP could increase projected public sector net debt in 2062-63 to around 150% of GDP. The OBR discusses the impact of changes to policy on their long-term projections. They show that excluding policy changes announced since the 2012 FSR, public sector net debt would have been projected to be around 50% of GDP higher by 2062-63. They identify the additional spending reductions announced for 2017-18 as one of the key factors in containing the growth of spending over the long-term, demonstrating the importance of the Government’s programme of fiscal consolidation for the long-term health of the public finances.

The FSR presents long-term projections of state pension expenditure including the Government’s new single tier state pension. The single-tier reforms will restructure current expenditure on the state pension into a simple flat-rate amount, to provide clarity and confidence to better support saving for retirement. This reform will cost no more than the current system.

The single tier reforms will complement the bold measures already taken by this Government to improve the sustainability of UK pension systems. Bringing forward the increase in the state pension age to 66 to 2020 is expected to deliver savings of around £30 billion while bringing forward the increase to 67 to 2028 is expected to deliver savings of around £70 billion. Further, the Government have set out their plans to consider future changes to the state pension age in a more regular and structured manner, ensuring that the state pension age keeps pace with changing demographics and putting state pension expenditure on a more sustainable footing.

Together, single tier and state pension age reform will provide individuals with greater certainty about their retirement income and ensure a more sustainable system which represents a fair outcome across generations. This provides a solid foundation upon which individuals can plan for their retirement.

Reform of the state pension comes alongside the Government’s reforms to public service pensions. The Government have set out a package of reforms to rebalance taxpayer and member contributions in the short term, and to ensure that costs are sustainable and fair in the long term. The new scheme designs, rebalancing of contributions between members and the taxpayer, and switch to uprating by the consumer price index (CPI) are forecast to save £430 billion over the next 50 years.

The OBR’s report also focuses on the pressures of an ageing population on social care spending, and the projections reflect for the first time the impact of the historic reforms to social care funding announced earlier this year. The Government will introduce a cap on lifetime care costs, greater means-tested support for residential care and deferred payments, so that nobody faces unlimited care costs, more people get support with their residential care costs sooner, and nobody is forced to sell their home in their lifetime to pay for residential care. The Government are also taking action to deliver better, more efficient care. For example, the spending round set out radical plans to create a £3.8 billion pooled budget shared across health and care, to deliver more integrated services, which we expect to manage down pressures across both services.