The OBR's first Fiscal Sustainability report

 

The Office for Budget Responsibility (OBR) last week confirmed what many of us have long feared: that short-term fiscal retrenchment, prioritised by chancellor George Osborne following New Labour’s record borrowing, must be followed immediately by tough medium-term decisions over tax and spending rates due to demographic pressures.

The OBR’s first Fiscal Sustainability report, published on 13 July, revealed that rapid demographic changes alone could require the UK to increase spending by £80bn annually by 2060. According to the OBR, health and pensions account for the largest share of the projected increase in spending – with both expected to require an additional 2.4% of national income simply to sustain current policy commitments.

To non-bean counters, this means increased life expectancy requires that we will have to pay a lot more simply to fund the health, care and benefits promises currently offered to UK citizens. Heaven knows what improvements to these services – the Holy Grail of all governments – would require in financial terms.

While these observations are not new to all taxpayers, they are a sharp reminder that – in the event of problems achieving greater productivity in the public sphere – the spectre of potential long-term tax rises awaits us once we emerge from our current economic woes.

Happy reading indeed – and little wonder the Treasury was so keen to hand delivery of such news to an ‘independent’ OBR!

However, according to an analysis of the OBR report by the peerless Institute for Fiscal Studies (IFS), we at least know where much of Whitehall’s focus on productivity improvements – the key method of getting more ‘bang’ for our taxpayer ‘buck’ – should be.

The IFS notes that the ‘big risk’ to the public finances ‘is that productivity in health services could grow less quickly than in the rest of the economy’. Were this to happen, the OBR estimates this could require health spending to increase by a further 5.3% of national income by 2060.

Which all highlights why NHS reform is critical not just for improved current health outcomes (although that should remain the key aim), but for the long-term health of the economy generally.

In this context, it’s perhaps a little easier to understand why health secretary Andrew Lansley has so aggressively pursued his reform programme. But as Mr Lansley’s critics have rightly been quick to remind him, if these (and other) reforms do not work – if they fail to improve health productivity – the fall-out could not be more serious.

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