Sustainability of the UK Public Finances: A Long-Run Perspective

Commentary on the public finances has been prominent following the Chancellor’s Spring Statement on 13 March 2018. Much of the comment has focussed on developments since the financial crisis and forecasts for the next few years. This Briefing takes a wider perspective and places the existing debt and deficit positions in a longer-term context, both historical and into the future. From this perspective, it explores views on the question of whether the debt position is ‘sustainable’.

The Briefing looks at the origins and history of the national debt, the reasons why it varies over time and how interest payments on the debt arise—and subsequently themselves feed back into the debt.

Based on historic analysis, it could be argued that the current position of the UK public finances is sustainable. However, the Office for Budget Responsibility (OBR) is specifically tasked with considering sustainability as part of its remit, and it takes a different, forward-looking perspective. The OBR’s projections have “huge range of uncertainty”, but on its central projection it concludes that the fiscal position is unsustainable over the long-term. The key reason for this is the impact of “an ageing population and further upward pressure on health spending from factors such as technological advancements and the rising prevalence of chronic health conditions”. The OBR concludes that: “policymakers and would be policymakers will need to think carefully about the long-term consequences of any policies they introduce in the short-term”. Brexit also introduces a further source of uncertainty both in the shorter and longer terms.

The Briefing concludes with the policy implications put forward by the OBR, as well as from some shorter term work by the Institute for Fiscal Studies and a related report by the Institute for Economic Affairs.