UK - Existing plans by the government for fiscal tightening of 6.3% of GDP, or £90bn, over the next few years, to return the current budget to balance by 2017/18, is not sufficient to counter the costs of an ageing population, PricewaterhouseCooper (PwC) has warned.

A research report from the firm - ‘With public debt rising so high, how can we meet the fiscal costs of an ageing population?’ - claimed that to reduce the public sector net debt to below 40-50% in the next 20 to 40 years, “an additional 1.7-3% of GDP of fiscal tightening is needed to cover the long-term fiscal costs of an ageing population”.

The figures, based on HM Treasury’s long-term public finance projections from March 2008 and medium-term projections released in April 2009, suggested the consequence of the additional “fiscal squeeze”, through increased taxes or public spending cuts, could cost the average household between £4,600 and £5,300 a year from 2018.

PwC said Treasury projections suggest total UK public spending might rise by up to 4% of GDP over the next 50 years mainly because of increasing pension and healthcare costs relating to an ageing population, despite including the impact of an increasing state pension age.

It argued that to avoid an unsustainably large rise in public debt, “a further significant fiscal tightening” is needed to halt the debt increase in the medium-term to 2018, because “to wait until age-related public spending actually rises significantly before making this additional fiscal adjustment would impose a heavier burden on future generations of workers”.

Analysis by the firm revealed that without any further reductions the public debt to GDP ratio would reach 115% by 2057/58, “which would clearly be unsustainable”, and concluded the 6% reduction proposed by the Treasury “is unlikely to be the end of the pain”.

However the study also concluded other policy measures, such as more rapid increases in state pension ages after 2020 and efforts to lengthen working lives, “are worthy of consideration to minimise the scale of the fiscal burden that future generations are going to have to suffer”.

John Hawksworth, head of macroeconomics at PwC and author of the report, 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.”

He pointed out the Treasury’s plan to get annual public borrowing under control by 2017/18 would still leave the public debt at close to 80% of GDP, and if future governments want to reduce this to 40% of GDP before 2050, the estimated cost would be £30bn a year if action is taken by 2018.

However, Hawksworth warned: “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.”

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