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OBR casts doubt on Chancellor's surplus law

12 Jun 2015

The Office for Budget Responsibility (OBR) has said that Government spending policies are expected to "widen" the budget deficit in the medium to long term, largely because of the ageing population.

The OBR report comes just a day after Chancellor George Osborne announced plans to enshrine in law measures to prevent future governments from running a budget deficit - that is, spending more than they receive in tax revenues - during periods of economic growth.

On Wednesday Mr Osborne claimed that a new, stricter fiscal framework overseen by an independent watchdog would "move Britain from crisis and recovery, and towards a new settlement of responsibility and prosperity". He said: "In normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare us for an uncertain future."

The timing of the OBR’s announcement is therefore unfortunate for the Chancellor. It claims that on current Government spending plans the primary budget balance was projected to move from a surplus of 2.1% of GDP in 2019/20, to roughly neutral in the mid-2030s and then to a deficit of 1.9% of GDP in 2064/65.

This represented an overall ‘deterioration’ of 4% of GDP, equivalent to £76bn in today’s terms - and the chief reason for it would be the steady upward pressure on spending created by an ageing population.

However, the OBR did indicate that in the shorter term the Government would indeed run a surplus, and commentators have observed that the long-term predictions for future decades are highly uncertain.