Broader approach needed to understand public finances

by Kevin Reed

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15 Jul 2011

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A "BROADER APPROACH" is needed to truly understand the state of public sector finances, according to Pension Corporation's Dr Bob Swarup.

Responding to the Office of Budget Responsibility's report on the extent of public sector liabilities, Dr Swarup said that more liabilities and assets should be included in calculations.

"Some of the liabilities have been captured (PFI projects, for example) but there are other important liabilities arising from social-moral commitments that are not. The state pension is a prime example," said Dr Swarup.

He also proposes a calculation of all future government spending based on current policy, which could be balanced by including tax that would be expected to be paid.

"Intriguingly, some people, such as Martin Weale and Professor James Sefton, have tried to use an approach called generational accounting to look at this. Assuming current spending and tax policies (and individual behaviours) remain unchanged forever, they have projected all government spending and revenue into the future. The numbers are stark," he said.

"With the population ageing rapidly, the share of pension and health spending in GDP will rise strongly over the coming decades. Their numbers, though based on 2008, indicated that the fiscal position would have to be tightened by around 10% of GDP to ensure long-term solvency."

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