It gets worse. Keep in mind that the projections made in January assumed that productivity growth, the major determinant of economic growth, would average 2 percent per year into the long run. Yesterday, the OBR downgraded this judgement to 1.3 percent. While productivity growth has declined across the advanced world in the past decade, the Brexit-stricken U.K. is suffering an extra hit by weakening the economic ties with its biggest market, the EU.
In this new context, the earlier forecast that debt would rise to 250 percent of GDP within 50 years looks like a significant underestimate, to put it mildly. By reducing projected growth rates for wages and profits, the new lower outlook for trend productivity growth steepens the U.K.’s future fiscal hill. Unlike revenues from taxation, which mostly rise and fall in line with the rate of economic growth, future costs coming from the ageing population are independent of economic factors.
The U.K. is not alone. Other advanced countries, including the U.S., have similar or often worse demographic trends and are heading in the same direction. Few major advanced nations seem to have prepared for this by fixing the roof while the sun is shining, with Germany, often criticized for running “excessive” fiscal surpluses, among the exceptions to the rule.
