A fiscal squeeze, building up to around £5,000 a year per household within the next decade, is needed to cut public debt and meet costs of ageing, says PricewaterhouseCoopers LLP

Published at 12:09 PM on 21 May 2009

UK households on average face a potential fiscal squeeze building up to around £4,600-5,300 per annum from 2018 onwards if the government is to get public debt back under control and meet the potential long-term costs to the taxpayer of an ageing population.

New analysis by economists at PricewaterhouseCoopers LLP (PwC) suggests that the total required fiscal tightening over the period to 2018 – through tax increases and/or public spending being constrained to grow more slowly than trend GDP – is likely to build up to around 8-9.3% of GDP (around £115-133bn a year at today’s GDP values, which translates to around £4,600-5,300 on average per household on an ongoing annual basis from 2018).

The Treasury pencilled in an estimated 6.3% of GDP fiscal tightening in the Budget and Pre-Budget Report for the period to 2017/18. However, PwC estimates that, depending on the precise debt target and timescale adopted, an additional 1.7-3% of GDP of fiscal tightening is needed to cover the long-term fiscal costs of an ageing population and get public sector net debt back below 40-50% of GDP within the next 20-40 years (see table in note 1 attached). This equates to around £25-43bn at today’s GDP values, or around £1,000-1,700 on average per household per annum.

The PwC study also concludes that other policy measures, such as more rapid than planned increases in state pension ages after 2020 and other efforts to boost working lives, are worthy of consideration to minimise the scale of the fiscal burden that future generations are going to have to suffer.

The study is based on a PwC model that updates the Treasury’s latest long-term public finance projections from March 2008 to allow for subsequent events and the new medium-term Treasury fiscal projections up to 2017/18, as set out in the April 2009 Budget. This model is used to analyse possible options for meeting alternative public debt reduction targets, given the projected fiscal costs of an ageing population.

The Treasury’s March 2008 long-term projections suggested that total UK public spending might rise by around 4% of GDP over the next 50 years due to increasing pension and healthcare costs associated with an ageing population (see table in note 2 attached). This estimate already allowed for a significant offsetting reduction in non-age-related spending as a share of GDP and a gradual rise in working lives associated with an increasing state pension age. Without any further fiscal tightening beyond the plans announced in the Budget for the period to 2017/18, the PwC model projects that the public debt to GDP ratio would increase to around 115% of GDP by 2057/58, which would clearly be unsustainable.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, said:

“Waiting until age-related public spending rises significantly before making additional fiscal adjustments would be imprudent. Provisions for these potential costs should be made sooner rather than later to avoid unduly large increases in the tax burden on future generations of workers to pay for the future pensions and healthcare costs of current generations of workers.

“The Treasury put a plan in place in the Budget to get annual public borrowing back under control by 2017/18, but this will still leave the public debt stock at close to 80% of GDP, almost double the 40% ceiling under the old fiscal rules. If future governments want to get this debt ratio back down to 40% of GDP before 2050, then we estimate that the cost could be an additional £30bn per annum at today’s values if action is taken by 2018. But if this action is delayed until 2030, then the cost could rise to around £53bn at today’s values, implying a permanent extra £23bn annual burden on taxpayers in 2030 and beyond. This seems neither fair nor prudent.”

ENDS



For more information contact:

Natasha. Davies
Tax Senior PR manager, PricewaterhouseCoopers LLP 
Tel:020 7212 3343 
Mobile:07709 019 290 
 

John Hawksworth
Head of Macroeconomics, PricewaterhouseCoopers LLP 
Tel:020 7213 1650 

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