The Government must save £17bn more or increase tax at the end of its current austerity plan if it is to avoid a £65bn hole in the public finances.
In its annual fiscal sustainability report, the Office for Budget Responsibility (OBR) yesterday warned that the additional £17bn savings before April 2018 were needed to get UK debt back to pre-crisis levels by 2061.
The ageing population will increase the budget deficit by £65bn if nothing is done, the OBR said.
This sum is in addition to George Osborne’s £123bn, seven-year fiscal consolidation programme, which includes hundreds of thousands of public sector job losses, an overhaul of the welfare system and a higher pension age.
Chief Secretary to the Treasury Danny Alexander said the OBR analysis shows the Government’s plans are “essential to restoring long-term sustainability in the public finances”.
The ageing population is the key driver behind the pressure on public finances, as spending on healthcare and pensions increases, while dwindling tax revenues from sources such as North Sea oil interests also have an impact.
The OBR report said: “In the absence of offsetting tax increases or spending cuts this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory.
“It is likely that such a path would lead to lower long-term economic growth and higher interest rates, exacerbating the fiscal problem. The UK, it should be said, is far from unique in facing such pressures.”
TUC general secretary Brendan Barber said: “We know that austerity is already failing, with falling taxes and rising social security costs leaving the Government’s borrowing targets in tatters.
“The last thing our economy needs is years more of the same failing medicine. A strong recovery, driven by investment in new infrastructure, industries and decent job creation, is the best basis for securing sustainable public finances.”