The Office for Budget Responsibility, set up in 2010, has now issued its first Fiscal Sustainability Report*, which takes a long range look at the UK economy.

The report firstly sets out clearly that it is looking at a 50 year long term timeframe, well beyond their own medium term report of March 2011, the Economic and fiscal outlook (EFO).

The authors also point out that this is an imprecise art and that it should be seen as broad brush and not exact.

Taking the public sector’s balance sheet as a starting point, the projected spend, revenue and other significant financial transactions from each government department has been projected over the next 50 years.

The public sector balance sheet includes potential liabilities that arise from previous government decisions and are applied using commercial accounting rules. It therefore includes such things as public sector pensions and PFI liabilities on the one side and the value of certain assets on the other that public sector net debt (PSND) does not include.

As a result, in March 2010, PSND stood at £760 billion (52.8% of GDP) but the more realistic balance sheet approach had the overall net liabilities at a much greater £1,216 billion (84.5% of GDP).

The report cites demographic change as ‘a key source of long-term pressure on the public finances’. With the UK projected to have an ageing population over the coming decades.

Their conclusion is that, if policy remains ‘unchanged’, ‘the public finances are likely to come under pressure over the longer term, primarily as a result of an ageing population’. Although government revenue would stay about the same as a share of national income, more of it would be spent on pensions and healthcare.

Many older people do relocate abroad these days but the related liabilities remain as pension and healthcare costs are still borne in the main by the UK.

So expect more policy changes with respect to pension ages and funding in the future.

Some data from the report is worthy of note:

  • In March 2011 PSND stood at £906 billion, which equals £35,000 per household. And that does not include public sector pensions and PFI liabilities as pointed out above.
  • Public sector pension payments liabilities stood at £1,133 billion in March 2010. That is 78.7% of GDP.
  • PFI contract capital liabilities were about £40 billion in March 2010 (2.9% of GDP), of which only £5.1 billion were accounted for in the PSND.
  • The best guess for expected costs for provisions for the future, including nuclear reactor decommissioning, came in at £105 billion (7% of GDP).
  • Contingent liabilities with a less than 50% chance of costs arising were put at about £207 billion (14.4% of GDP).
*The OBR is required, under the Budget Responsibility and National Audit Act of 2011, to provide “an analysis of the sustainability of the public finances” annually.

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