Rise in health spending puts state debt on unsustainable path, report warns

By Andrew Woodcock17th July 2018News EnglandBrexit, Business / Funding / Finance, Finance, Government / Politics, News England, NHS

The Government’s promise of a £20 billion boost for the NHS will put debt on an “unsustainable upward trajectory” without tax rises or spending cuts to pay for it, the Office for Budget Responsibility has warned.

A fiscal “tightening” totalling around £111 billion in today’s money could be needed in 2023/24 to get debt under control, the official forecaster said.

In its Fiscal Sustainability Report, the OBR said that, without changes to tax and spending policy, public sector net debt could rise from 80% of GDP in 2022 to almost 283% by 2067.

And it dismissed suggestions that the increased NHS spending could be paid for with a “Brexit dividend”, stating that “Brexit is more likely to weaken than strengthen the public finances overall”.

The OBR said: “On current policy we would expect the budget deficit to widen significantly over the long term, putting public sector net debt on a rising trajectory as a share of national income.

“This would not be sustainable.”

And it added: “The main lesson of our analysis is that future governments are likely to have to undertake some additional tightening beyond the fiscal plans in place for the next five years in order to address the fiscal costs of an ageing population and upward pressures on health spending.

“Leaving all or part of the June 2018 health spending announcement unfunded would simply require greater action later.”

Announcing her plan for a £20.5 billion annual real-terms rise in health spending by 2023/24 last month, Prime Minister Theresa May acknowledged that taxpayers “will have to contribute a bit more in a fair and balanced way”.

But she did not put a figure on the increase, and said that some of the extra funding would come from savings from contributions to EU budgets after Brexit.

Asked, following the publication of the OBR report, whether the Prime Minister still believed there would be a Brexit dividend, Mrs May’s official spokesman said: “Yes, there are substantial sums of money which we are currently sending to Brussels. Once we have left the EU, we will no longer have to do so.”

The spokesman declined to discuss possible future tax rises, but said: “It remains a Government priority to continue to reduce the debt burden.”

Chancellor Philip Hammond said the report showed that ministers cannot be “complacent” about the need to hold debt down.

“We must continue to deliver on our commitment to fix our public finances, and we must reject the arguments of those who think that debt can rise again without consequences,” said Mr Hammond.

“Our balanced approach is getting debt falling while keeping taxes low, supporting our valuable public services, and investing to raise our productivity as we build a stronger economy and deliver on our promise of a brighter future for the next generation.”

But shadow chancellor John McDonnell (pictured) said: “Today’s OBR report is damning for a Government that cannot explain where planned extra NHS spending will come from.

“After years of underfunding our NHS, additional money is essential and so the Tories must come clean about whether the Chancellor wants to increase government borrowing, increase taxes or cut spending on other departments.”

Under the OBR’s projections, public sector net debt is forecast to fall from a peak of 85.6% of GDP in 2017/18 to 80% in 2022/23.

But after that point, extra spending pressures including an ageing population and increasingly expensive medical treatments is forecast to drive it up to 282.8% by 2067/68.

Branding the projected rise “unsustainable”, the report states: “Needless to say, in practice policy would need to change long before this date to prevent this outcome.”

Under the projections, annual state spending – excluding interest payments on the UK’s debt – would rise from 36.4% of GDP in 2022/23 to 44.6% in 2067/68. This is the equivalent of an extra £172.8 billion in today’s money.

Health spending would rise from 7.6% to 13.8% of GDP over the same period, while pension costs would increase from 5% to 6.9%, unless the current triple-lock protection is abandoned. Adult social care costs would soak up 1.9% of GDP in 50 years’ time, compared to 1.3% in 2022.

Without changes to fiscal policy, these pressures would push the state deficit – the difference between the amount spent by the Government each year and the amount collected in taxes and other income – would rise from 0.3% of GDP to 8.6% over the same period, equivalent to £176.5 billion a year in today’s money.

The report set out possible options for reining in debt, by “tightening” fiscal policy through tax rises and spending cuts.

One option would be a one-off tightening of 5.2% of GDP – £111 billion in today’s money – in 2023/24, which could be expected to hold debt down to around 40% of GDP in 2067/68, but would see it rise after that date.

An alternative would be to tighten policy by 1.9% of GDP every decade for the next 50 years, which would stabilise debt at around the target level and prevent it taking off again, said the OBR.