Today sees the publication of two reports which underscore the need for continued fiscal responsibility: the Office for Budget Responsibility’s (OBR) 2018 Fiscal Sustainability Report (FSR) and the government’s report on Managing Fiscal Risks [CM 9647]. The publication of the FSR fulfils the OBR’s legal obligation to publish an analysis of the sustainability of the long-term public finances and an assessment of the public sector balance sheet at least once every two years. Managing Fiscal Risks fulfils the government’s obligation to respond to the OBR’s 2017 Fiscal Risks Report (FRR). These reports have been laid before Parliament today and copies are available in the Vote Office and Printed Paper Office.
These reports come at a turning point for the public finances. The government has made significant progress in repairing the public finances over the past eight years. The deficit has been cut by over three-quarters from its post-war peak of 9.9% of GDP in 2009-10 to 1.9% in 2017-18. The debt-to-GDP ratio is now forecast by the OBR to have peaked last year and to begin its first sustained fall in a generation from this year.
Both reports illustrate the long-term pressures and risks to the public finances, underscoring the importance of locking in this hard-won progress and continuing to reduce debt. As analysis by international experts and the OBR’s own fiscal stress test has shown, governments with high levels of debt are more vulnerable to shocks and have less room to use fiscal policy to mitigate their impact on the economy. Moreover, leaving government debt at current levels would see the burden of servicing that debt rise to levels not seen since the mid-1980s if interest rates normalise in the way assumed in the OBR’s long-run projections. This would pass an unacceptable burden on to the next generation. The government is therefore committed to continuing to reduce debt as a share of GDP.
The 2018 FSR projection shows that, left unaddressed, demographic change and non-demographic cost pressures on health, pensions, and social care would push the debt-to-GDP ratio to over 280% of GDP by 2067-68. One of the most important drivers of the long-run fiscal outlook in the FSR is health spending, which the OBR project will rise from 7.6% of GDP in 2022-23 to 13.8% in 2067-68 in the absence of action to increase productivity and contain costs. While this is partly explained by population ageing, most of the projected increase is due to non-demographic cost pressures - including the low productivity of the health sector relative to the rest of the economy; increases in chronic conditions; and improvements in technology and medical research leading to the provision of new drugs and treatments.
The government recognises that the NHS will need additional resources to help meet these pressures. In June, the Prime Minister announced that the NHS in England will receive an increase in funding over the next five years that equates to over £20 billion a year more in real terms by 2023-24. The government also recognises the need for action being taken to address long-term cost-drivers in health. The final settlement will be confirmed at a future fiscal event, subject to an NHS 10-year plan that delivers the efficiency, productivity, and performance improvements necessary to help address the long-term cost pressures highlighted by the OBR. The government will fund this five-year commitment in a responsible way, while continuing to meet its fiscal rules and reduce debt. As the Prime Minister has said, this will be partly funded by money that we will no longer spend on our annual membership subscription to the European Union after we have left. In addition, across the nation, taxpayers will need to contribute a bit more in a fair and balanced way to support the NHS we all use.
The government is also determined to tackle the other risks and pressures facing the public finances, to lock in the hard-won progress we have made in reducing borrowing and getting debt falling. The OBR’s 2017 Fiscal Risks Report provided the UK’s first ever survey of the potential risks to the public finances and was recognised by the IMF, OECD, and others as the most comprehensive report of its kind and the only one produced by an independent body. By publishing our response today, the government invites Parliament and the public to hold us to account for the responsible management of those risks.
Managing Fiscal Risks shows how the government is tackling these risks as we continue to repair the public finances for the benefit of current and future generations – following our balanced approach to the public finances, getting debt falling whilst investing in our vital public services and keeping taxes as low as possible.
The report sets out the specific steps the government is taking to mitigate key sources of risk identified by the OBR. These include actions to reduce the likelihood and cost of financial crises, adapting the tax system to a changing economy, improving the sustainability of the State Pension in light of rising longevity, tightening controls over the issuance of loans and guarantees, and managing the government’s inflation exposure by considering the appropriate balance of index-linked and conventional gilts.
It also highlights that in the long-run, boosting productivity growth would accelerate the return to fiscal sustainability and alleviate pressures on taxpayers and public services. The government is taking forward a comprehensive strategy for boosting productivity based on supporting long-term investment in physical, human and intellectual capital.
Supporting the vision set out in the modern Industrial Strategy, the government is increasing investment in key productivity-boosting infrastructure. The National Productivity Investment Fund will provide £31 billion of additional investment in areas critical to improving productivity and £1 billion in improving the UK’s digital infrastructure. We have increased public support for R&D to its highest level in 30 years and are committed to increasing public and private investment in R&D to 2.4% of GDP by 2027.
The government is also committed to making sure that Britain is the world’s most attractive location for private investment. We are supporting UK businesses by delivering a competitive tax system that supports growth and investment – including by reducing the corporation tax rate from 28% to 19% today, the lowest in the G20.
Building human capital through strengthening education and training is a priority for the government. We are taking action to transform technical education and help prepare people for the high-skilled jobs of the future, by investing in apprenticeships through the introduction of the Apprenticeship Levy, introducing a National Retraining Scheme, and introducing T-levels, which will mean that all 16-18 olds have a choice of technical and academic routes of equal status and quality.
These OBR reports and the government’s Managing Fiscal Risks report keep the UK at the frontier of fiscal management internationally and demonstrate the government’s commitment to fiscal transparency and accountability. No other government is so open about the risks to the public finances or more determined to manage them responsibly for the benefit of current and future generations.
This statement has also been made in the House of Lords: