Brits Should Get Used to Austerity

The U.K. government has mostly fixed its short-run fiscal problems caused by the global financial crisis, however, the long-run challenge of keeping fiscal policy on a sustainable path has grown even bigger, according to the latest economic projections published alongside Wednesday's Autumn Budget.

Over the medium term, U.K. fiscal policy looks to be heading towards calm waters. Combining the progress made under then-Finance Minister George Osborne from 2010 until early 2016 with the tax and spending plans announced on Wednesday by incumbent Philip Hammond, will manage to get the annual fiscal deficit down from a peak of 8% of gross domestic product in 2009 to less than 2.5% this year, and eventually to near 1% by early next decade. This should be enough for debt as a percentage of GDP to begin to fall gradually from around 87% of GDP from next year onward into the 2020s. This is good news.

But looking further out, U.K. fiscal policy appears to be heading towards a storm. Back in January, the Office for Budget Responsibility, the U.K.'s independent fiscal watchdog, projected that U.K. public debt will rise again from the 2030s onward to nearly 250% of GDP by the 2070s. Rising health, state pension and long-term social care costs linked to demographic factors are likely to cause the fiscal deficit to surge again. U.K. public sector debt is projected to reach highs not seen since World War II.