July 12, 2012 / 11:14 AM / 7 years ago

UK long-run budget outlook remains "unsustainable"

LONDON (Reuters) - Britain’s fiscal outlook over the next 50 years remains “clearly unsustainable”, despite the government making some progress in reducing current borrowing and public-sector pension commitments, an official watchdog said on Thursday.

Deep spending cuts by the coalition to plug a record budget gap are a political hot potato in recession-hit Britain, with the opposition saying they delay growth and some economists calling for more fiscal stimulus.

The Office for Budget Responsibility said it expected public sector net debt to fall from 74 per cent of GDP in 2016-17 to a trough of 57 percent in the mid-2020s, before increasingly quickly back up to reach 89 percent of GDP in 2061-62.

Still, that was better than its long-run forecast a year ago, when it predicted debt would total 107 percent of GDP by 2060-61.

The OBR attributed the improved forecast primarily to additional planned public spending cuts, including layoffs in the public sector and reductions in government employees’ pensions.

Nonetheless, the OBR said more needed to be done to put Britain’s public finances on a secure footing where total debt was not steadily rising in the long run.

“On current policy we would expect the budget deficit to widen sufficiently over the long term to put public sector net debt on a continuously rising trajectory as a share of national income. This is clearly unsustainable,” the OBR said.

It said it expected expenses related to an ageing population, such as pensions and health care, to eat up more of the national income while the same demographic trends would leave government revenues roughly stable as a proportion of GDP.

To return public debt to its approximate pre-crisis level of 40 percent of GDP in 2061-62, the government would need to implement a permanent tax increase or spending cut of 1.1 percent of GDP in 2017-18, after the latest budget forecast period ends, the OBR added.

Simon Hayes, economist at Barclays, said: “These are not large numbers, bearing in mind that the adjustment could in practice be spread across a number of years, and the government’s current deficit reduction plan involves discretionary tightening of 1-1.5 percent of GDP per year over the next five years.”

Deputy finance minister Danny Alexander said that the OBR report vindicated the decision in 2010 by the new Conservative-Lib Dem coalition to make deficit reduction a priority.

“The OBR analysis makes it clear that our medium-term consolidation plan is essential to restoring long-term sustainability in the public finances,” Alexander said.

However, the Labour Party argues that the coalition’s pace of deficit reduction is self-defeating as it stunts the growth also needed for Britain’s public finances to be sustainable.

Moreover, some question the very validity of the OBR’s long-term fiscal projections.

“As the OBR acknowledges, these forecasts are highly uncertain. Who could have predicted our current economic mess back in 1962?” said Brendan Barber, the general secretary of Britain’s trade union umbrella body, the TUC.

“We know that austerity is already failing. The last thing our economy needs is years more of the same medicine,” he added.

Additional reporting by Sophie Kirby; Editing by Hugh Lawson

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