EU warns that UK’s Black Hole is unsustainable

The European Commission has just published its latest Sustainability Report that looks at the state of the government finances of member nations. And the warning is pretty clear - without strong corrective action the UK runs the risk of public sector debt becoming unsustainable

The cost of servicing the debt is set to rise sharply and the temptation to allow inflation to accelerate in a bid to cut the real value of outstanding government borrowing will strengthen. Sean O’Grady writes about this in this article in the Independent.

We often come across the concept of sustainability in our study of environmental economics. Here the term is used slightly differently - but a common thread is the impact of government spending, taxation and borrowing decisions spread across different generations in the long-term. According to the EU

“The concept of the sustainability of the public finances concerns the ability of a government to finance its current debt and expected expenditure. Government debt involves the deferral of payments to future taxpayers and restricts choice about how to spend the products of their labour and investment.”

A clear statement here that raises the issue of inter-generational equity.

According to the report:

*Britain will suffer a “sustainability gap” of 12.4 per cent of GDP – meaning tax rises or spending cuts amounting to close to £200bn a year.

*The black hole in the British public finances is far higher than the EU average of 6.5 per cent.

*Long term demographic changes - notably the aging population will put even more strain on government spending and borrowing - for example they forecast that the UK’s working age population (15-64) will fall from 66% of the population in 2008 to 59% in 2060. Spending on long-term health care as a share of GDP will double over the same period

*The UK’s government debt in 2009, the base year of the analysis, stood at 68.4% of GDP and is forecast to increase to around 82% of GDP in 2010.

The report is further evidence of the tough fiscal choices and decisions that will confront the next government in May 2010.