Public to face £5000 'fiscal squeeze'

Thursday, May 21, 2009

Every household in the UK will have to face a 'fiscal squeeze' of over £5000 a year – through tax increases and spending cuts – if the government is to get public debt back under control and meet the costs of an ageing population, PricewaterhouseCoopers (PwC) has said.

Although the Treasury estimated a fiscal tightening of 6.3 per cent of GDP between now and 2018, PwC reckoned it will be more like eight to 9.3 per cent, which equates to £115bn to £133bn or £4,600 to £5,300 per household. The difference is explained by the long-term costs of meeting the needs of more and more elderly people and attempts to get public sector net debt back below 40 to 50 per cent of GDP in the next 20 to 40 years. Larger than expected increases in state pension ages after 2020 could also be a factor.

John Hawksworth, PwC's head of macroeconomics, 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 of workers."

He added: "The Treasury put a plan in place in the Budget to get annual public borrowing back under control by 2017/18, but this will still leave the public debt stock at close to 80 per cent of GDP, almost double the 40 per cent ceiling under the old fiscal rules. If future governments want to get this debt ratio back down to 40 per cent of GDP before 2050, then we estimate that the cost could be an additional £30bn per annum at today's values if action is taken by 2018. But 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."