The Office for Budget Responsibility (OBR) is warning that the Prime Minister’s recent pledge to increase spending on the NHS is likely to put significant pressure on public finances, placing public sector net debt on an ‘unsustainable upward trajectory’, unless the government introduces future tax rises or spending cuts
The OBR’s July edition of its fiscal sustainability report (FSR) projects a less favourable long term outlook than it did at the start of the year.
The report states: ‘This is more than explained by the June health spending announcement, which – in the absence of accompanying offsetting tax or spending measures – increases spending by significantly more than the modest fiscal tightening implied by dropping the Dilnot reforms and accelerating rises in the state pension age.
‘If the higher health spending were to be fully financed by tax rises or cuts in other spending, the longterm outlook for the public finances would be little changed from our 2017 FSR.’
The OBR said it had incorporated the £20bn NHS pledge announcement both because it is very large compared to most policy announcements outside scheduled fiscal events, and because health is the most important component in its long-term analysis, given the demographic trends of an ageing population and the rise in chronic conditions.
The OBR points out that when announcing the additional health spending, Theresa May said that it would be funded by a ‘Brexit dividend, with us as a country contributing a little more’. To date, the government has not set out the size or composition of any additional taxpayer contribution, either through higher taxes or cuts in other spending, meaning the OBR cannot include this in its projections.
As regards the ‘Brexit dividend’, the OBR says provisional analysis suggests that Brexit is more likely to weaken the public finances than strengthen them over the medium term, thanks to its likely effect on the economy and tax revenues.
Looking more narrowly at direct financial flows with the EU, the OBR has estimated that the UK would have had to make a contribution of £13.3bn to the EU budget in 2022-23 if it remained a member. Of that potential saving, £7.5bn will be absorbed by the withdrawal settlement payment expected for that year, leaving £5.8 bn to be spent on other things.
In principle this could cover slightly less than 30% of the cost of health package in that year, but this does not take into account other calls on these potential savings, including commitments the government has already made on farm support, structural funds, science and access to regulatory bodies, the OBR highlights.
The report states: ‘Pending a detailed withdrawal agreement and associated spending decisions, we assume in this report that the extra health spending adds to total spending and borrowing rather than being absorbed in whole or part elsewhere.’
Overall, the OBR’s baseline predictions show the primary budget deficit (the difference between noninterest revenues and spending) is projected to move from 0.3% of GDP in 2022-23 to 8.6% of GDP in 2067-68 – an eventual overall deterioration of 8.3% of GDP, equivalent to £176.5bn a year in that year in today’s terms.
Separately, the Treasury has published its response to the OBR’s inaugural fiscal risks report (FRR), which is set to appear every two years and which looks into the main risks to the public finances.
The OBR’s first report, in July 2017, listed 57 separate risks to the government’s finances. The Treasury is required to respond within a year of publication and has now released a document outlining the actions the government is taking with regard to the issues raised.
OBR fiscal risks report July 2017 is here.
Report by Pat Sweet