In our Fiscal sustainability report (FSR), we assess the potential fiscal impact of future government activity by making long-term projections of revenue, spending and financial transactions on an assumption of ‘unchanged policy’, as best we can define it.
Our baseline projections show public spending increasing as a share of national income beyond the medium-term forecast horizon, exceeding receipts by increasing amounts over the projection period. Taking this and our projection of financial transactions into account, public sector net debt is projected to fall from its medium-term peak of around 86 per cent of GDP in 2017-18 to around 80 per cent of GDP in 2021-22, before rising steadily thereafter and reaching 283 per cent of GDP in 2067-68.
Demographic change is a key long-term pressure on the public finances. Like many developed nations, the UK is projected to have an ‘ageing population’ over the next few decades, with the ‘old-age dependency ratio’ – the ratio of the elderly to those of working age – rising. This reflects increasing life expectancy (particularly among older people), relatively low fertility rates, and the retirement of the post-war ‘baby boom’ cohorts.
We base our analysis on detailed population projections produced by the Office for National Statistics (ONS). We use the ‘principal’ ONS population projection for our fiscal projections and test the sensitivity of our conclusions to using the different ONS variants.
For our FSR 2017, we worked with ONS Digital to produce this tool that helps to illustrate the uncertainty around our long-term projections. Choose a scenario and drag the slider across years to see how the age structure of the population is projected to change, what that would mean for the dependency ratio, and how that would affect our projection for debt and estimate of the fiscal tightening that would be required to bring debt down to 40 per cent in 50 years’ time.
A description of each scenario can be found in the sensitivity analysis section from page 98 in the Fiscal sustainability report.