UK will need vast fiscal tightening to avert debt spiral, OBR predicts

By Andy Bruce

MANCHESTER, England, July 7 (Reuters) - Britain will need extra tax rises or spending cuts equivalent to the entire education budget early next decade to prevent government debt spiralling higher from current levels, the Office for Budget Responsibility said on Tuesday.

The independent budget watchdog's annual look at the long-term sustainability of the public finances showed government debt was likely to move onto an "unsustainable and ever-rising path" in virtually all of its scenarios.

As in past years, the OBR cited an aging population and rapidly increasing spending on healthcare as key reasons why the public finances look to be on an unsustainable footing.

The findings underline the constraints facing the prime-minister-in-waiting Andy Burnham, who has sought to reassure investors by pledging to stick with the government's existing fiscal rules.

The OBR's assessment shows the Labour government's existing plans, even if delivered in full, would not be enough to stop debt climbing over the longer term — leaving little room for higher public spending associated with Burnham's platform.

OBR SEES HIGH COST OF INACTION

To keep public debt at its current level of around 95% of economic output in the long run, the OBR said the government would need to permanently improve the primary balance — the gap between revenues and expenditure excluding debt interest — by 3.8% of economic output in the 2031/32 financial year.

"This represents a one-year adjustment that would be around a third larger than the tightening the government plans to deliver over the coming five years, and roughly equivalent to total onshore corporation tax receipts or current departmental spending on education in 2030/31," the OBR said.

Even that estimate assumes the government delivers its existing plans in full through to 2030/31.

"Debt would move onto an unsustainable path much sooner in a scenario where there is a less favourable primary deficit in 2030/31," the OBR said.

The OBR warned that delaying action would increase the cost of putting the public finances back on a sustainable footing. Postponing action to the 2050s would mean improving the primary balance by 8% of GDP — close to the entire health budget.

FISCAL RULE REFORM COULD EASE PRESSURE, IPPR SAYS

Responding to the report, the finance ministry said its economic plan had been endorsed by the International Monetary Fund and that the OBR's forecasts showed the budget deficit falling in every year this parliament.

IPPR, a progressive think tank, backed Burnham's commitment to the fiscal rules as a way of boosting investor confidence but said they encouraged a short-term focus on fiscal headroom while penalising investment needed to ease pressures from ageing, climate change and weak productivity.

"The government should consider rethinking the fiscal rules in the years ahead to meet the long-term challenges we face," said IPPR senior economist William Ellis.

Faster growth — which Burnham is banking on — would ease the strain. 

If productivity growth returned to its pre-financial-crisis pace, the OBR said debt would be roughly 120 percentage points of GDP lower by the mid-2070s than around 300% in the baseline, and the required tightening would shrink to 1.8% of GDP.

(Reporting by Andy Bruce; Editing by Suban Abdulla and Catherine Evans)