The Obr Report On Fiscal Sustainability


Economics

The OBR have now released their annual Fiscal Sustainability Report for 2014. Public Sector Net Debt (PSND) in March 2014 stood at 76.1% of GDP a figure of £1,273 billion, or £48,200 per household.   The OBR looked ahead for the next 50 years and found that the budget deficit is projected to widen in the future, primarily because of increased expenditure on healthcare, pensions and long term social care that arises with an aging population.

Under their central projection the PSND, after a period of falling, will start to increase again on an upward trajectory.  Thus  the OBR concludes that their central projection will require some combination of tax rises and budget cuts for sustainability.

Alongside their central projection the OBR looked at the effect of a number of different assumptions on the PSND. By far the largest impact was healthcare productivity. They also looked at the impact of various net migration assumptions on the PSND.

Like most western countries the UK has an increasing old-age dependency ratio.  Migrants tend to be of working age and younger than the existing population but it is important to note that immigration cannot be used to maintain the old-age dependency ratio. This is because, obviously, migrants get older too and so ever increasing amounts of migration would be needed to maintain the same ratio of working age to old people.  However, a higher net migration rate of working age adults can initially slow the increase of the old-age dependency ratio and so theoretically have an impact on the PSND over the 50 year horizon covered by the OBR.   This impact becomes less and less over time as the number of migrants reaching retirement age relative to the fixed rate of new net migrants increases. High net migration, therefore, is not a solution to the demographic issues faces the UK.

In addition, the huge impact of high net migration on population growth must be taken into account. The OBR central projection has a net migration rate of 105,000 a year.  By 2063/4, at the end of the 50 year time period, this is projected to give a population of the UK of 76.2 million with a PSND of 83% of GDP. In contrast, the high net migration scenario of 225,000 would give a PSND of 41% of GDP while the UK’s population would increase by a further 8.4 million giving a total of 84.6 million.  That is 20 million more than our present population with all the pressures on infrastructure and housing that would create.  One of the OBR’s assumptions is that the availability of housing will match housing need; this seems very optimistic given the current housing crisis quite apart from its impact on our much valued countryside.

The impact of migration on the PSND is based on the assumption that migrants are younger than the existing population and share the same characteristics of that age group in the UK. The OBR assumes that migrants on the whole add more in revenue than they consume in services and quote the Dustmann and Frattini paper on fiscal impacts as a reference. However, D&F actually found that migrants were a net cost in every year they examined, regardless of the state of the economy. They did claim that those migrants who have arrived since 2001 made a positive contribution but this is a claim that Migration Watch and others have challenged and that, in any case, is likely to change as these recent migrants have families.  

Whether migration overall is fiscally positive or negative this is generally considered to have only a small impact compared to total GDP. Within this overall picture there is wide variation from the highly skilled worker who comes temporarily to the low paid migrant through to the spouse who is economically inactive.  Therefore, if policy was being designed to maximise the fiscal impact of migration it should probably focus on the type of migrant rather than the overall number.

 

11th July 2014

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