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<\/a><\/p>\nThe OBR\u2019s latest Fiscal Risks and Sustainability report<\/a>, published this week, gives a blunt assessment of the UK\u2019s public finances: we can\u2019t go on like this. If nothing changes, government debt will rise to an unsustainable 300% of GDP in 50 years\u2019 time.<\/p>\n How did things get so bad? Well, there\u2019s one big demographic challenge driving that number: the UK is an ageing society, with the median age projected to rise from 40 in 2025 to 49 in 2075. An older society is expensive; as each year passes, demands on the state by retirees gets larger, while the workforce that has to pay for it all gets smaller (first in relative terms, and eventually in absolute terms as well).<\/p>\n Sooner or later, taxes rise, spending falls or growth accelerates \u2013 duck all three, and we go bankrupt<\/p>\n But this is a forecast, not a prophecy. The OBR\u2019s figures show that the course we are currently on ends in economic disaster only if our politicians keep punting hard choices down the road. If they \u2013 and we \u2013 are willing to face reality, things can still be turned around.<\/p>\n The report highlights three big choices the next government needs to make.<\/p>\n 1. When to cut the deficit<\/p>\n The OBR says that just to hold debt at around 95% of GDP over the next 50 years, the government needs to permanently cut its primary deficit by 3.8% of GDP no later than 2031-32: meaning significant spending cuts or tax rises. But debt at 95% of GDP is still high by historical standards, and leaves the economy vulnerable to external shocks. Returning it to a pre-financial-crisis level of around 40% of GDP would require an even larger permanent reduction in the primary deficit of 4.9% of GDP, again from 2031-32 onwards.<\/p>\n Here\u2019s the catch: delay costs money \u2013 lots of money. Wait until 2052-53 to face the music, and the government will have to cut spending by almost 8% of GDP instead.<\/p>\n There\u2019s an additional benefit to cutting earlier. A credible commitment to cut the deficit increases confidence for buyers of government debt because a future risk of default is lower. It also increases business confidence: if the finances are sound, they know future tax rises are less likely.\u00a0<\/p>\n The OBR doesn\u2019t give a view about whether the deficit should be reduced by cutting spending or raising taxes. However, UK taxes<\/a> are already at a post-war high and the economic literature suggests that cutting spending is usually the better option. For example, \u2018Austerity: When it works and when it doesn\u2019t\u2019, a book by leading economists Alesina, Favero and Giavazzi, looks at data around fiscal consolidations from 1980 to 2015 and finds that cutting expenditure is much better for economic growth than raising taxes to eliminate a deficit.<\/p>\n 2. How to spend our taxes<\/p>\n This leads us onto the second choice \u2013 how government spends taxpayer money. In the OBR\u2019s baseline scenario, pension spending increases from 5% to 9% of GDP, health spending from 8% to 13% and adult social care from 1.2% to 1.8%. Much of this increase is driven by demographics, but there are choices available which can reduce their impact.<\/p>\n