Can’t see the wood for the trees?

Sometimes financial planning can be a bit overwhelming. It pays to take a step back, ignore the news and take a long-term view.

When you feel overwhelmed by the idea of financial planning, often it pays to step back,
ignore all today’s news and take a long-term view.

And taking a long view is exactly what the Office for Budget Responsibility (OBR) has done in its first ‘Fiscal Sustainability Report’, published in July. The OBR, which was set up by the current Chancellor, normally produces independent five-year Budget forecasts for the government, but its new report adopts a much longer timescale – 50 years – and starts where the Budget projections end, which is in 2015/16.

The report does not make comfortable reading. Even if the current austerity programme works as planned – and that is a big ‘if’, given the recent poor economic growth figures – there will be no scope to cut taxes after 2015/16. The main reason is the ageing of the UK population. About 26% of us are projected to be aged 65 or older by 2061, compared with 17% today. This increase will add a huge amount to government spending (£80 billion in today’s terms) spread across three main areas:

There are some offsetting increases in Government revenue, notably from a sharp jump in inheritance tax payments, but these are nowhere near enough to match the additional expenditure. In the OBR’s view, taxes will need to increase by £22 billion in today’s terms in 2016/17 to bring Government borrowing down to a sustainable level. So in theory, any hopes the current Government had for tax cuts before the next general election (scheduled for 2015) should be abandoned.

The OBR has reminded us that we are probably nearing the limits of state assistance in retirement and old age – the OBR does not assume any changes to the current system, beyond those already announced. The implication is that in the long term, how comfortable your retirement will be will depend upon the savings that you make while still part of the working sector of the population.