Tough Choices Await HM Treasury after OBR Sounds Alarm on the Public Finances

-Government NHS pledge means £184.7 bn budget by 2023.

-Health spending rises to 13.8% of GDP by 2068 says OBR.

-Spending adds 58% of GDP to public debt by 2068 says OBR.

© Foreign & Commonwealth Office, reproduced under CC licensing

Tough choices await HM Treasury over coming years, according to the Office for Budget Responsibility (OBR), as mounting pressures on the public purse will require either steep cuts to government spending or a rethink of tax policy.

The UK's population demographics have long been lamented as a burden on the public purse and are still expected to present the greatest challenge to budget sustainability over the coming decades, according to the OBR.

An ageing population of "baby boomers", combined with a diminishing birth rate, is expected to see increasing numbers of welfare recipients leaning on a lesser number of working taxpayers in future years. Such demographics are expected to have adverse implications for tax receipts as well as health, social care and pension costs.

This has long been the case. However, with Prime Minister Theresa May having announced plans for a marked increase in health spending, the National Health Service (NHS) and government fiscal policy is now back in the spotlight once again.

The OBR's latest Fiscal Sustainability Report attempts to identify the impact this policy will have on the public finances over a 50 year period and to quantify it with forecasts.

"In the absence of offsetting tax increases or spending cuts, the pressures we have identified would increase the budget deficit sufficiently to put public sector net debt on an unsustainable upward path," says the OBR. "Such a path could lead to lower long-term economic growth and higher interest rates, worsening the fiscal position further."

Government spending on the NHS will rise gradually over the next five years, such that the organisation's annual budget will be £20.5 billion higher by the end of 2023, according to PM May's plan. This will take total healthcare spending up from an OBR-estimated £150.2 billion in the 2018/19 year, to £184.7 billion by the end of 2023, although the impact this has on the broader public finances over the long term is even greater.

"Health spending rises from 7.6 per cent of GDP in 2022-23 to 13.8 per cent in 2067-68 as the population ages and non-demographic cost pressures mount," the OBR says. "In all, this adds 58 per cent of GDP to net debt in 2067-68, more than explaining the overall 42 per cent of GDP increase in net debt since our previous report."

Above: OBR projections of health spending as a share of economic output.

The OBR makes clear in its report that these projections do not take into account any tax increases or spending cuts the government may unveil at a later date in order to offset the impact increased health spending will have on the public purse. The government is yet to announce any offsetting measures, although it indicated in June that such measures will eventually be forthcoming.

Public finances and services have both been hot button issues in domestic politics during recent times, but particularly so in the wake of the 2008 financial crisis, which saw government tax revenues fall and public spending increase sharply. The government policy response to the financial crisis was to cut tax rates and to cut spending on public services.

That, combined with increasing demand on public services, has seen the perceived quality of services deteriorate and public anger increase. This left government wide open to criticism and has seen the public finances frequently deployed as a political football in parliament.

The opposition Labour Party has frequently lambasted the government for its cuts to public spending and continues to advocate increases to budgets in a range of areas, but particularly health and social care. It is yet to put forward a clear plan for mitigating the impact those policies will have on the budget deficit and public debt. 

Then-Prime-Minister David Cameron famously claimed, ahead of the June 2016 Brexit referendum, the NHS would be damaged by a vote to leave the European Union. He said there would be less funding available for the NHS because the post-crisis cycle of falling tax receipts and rising welfare payments would renew after a Brexit vote.

Pro-Brexit campaigners notoriously claimed the NHS would be able to benefit from a vote to leave the EU because the UK's estimated-£350 million per week membership fee could be redirected to the NHS budget. The £350 million per week figure was later revealed to have included the UK rebate and other monies returned to the UK by the EU.

"At the end of 2017-18, [government debt] stood at £1,779 billion, equivalent to 85.4 per cent of GDP or £65,000 per household," says the OBR. "The primary budget deficit is projected to move from 0.3 per cent of GDP in 2022-23 to 8.6 per cent of GDP in 2067-68 – an eventual overall deterioration of 8.3 per cent of GDP, equivalent to £176.5 billion a year."

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