A damning report by the European Commission on the long-term prospects for Britain's public finances warns that Britain is at "high risk" of running unsustainable debts—implying that the nation will be unable to service its debts and that only default or high inflation can relieve the burden.
The Commission's 2009 Sustainability Report says that Britain will suffer a "sustainability gap" of 12.4 per cent of GDP—meaning tax rises or spending cuts amounting to close to £200bn a year.
The Commission says the black hole in the British public finances is far higher than the EU average of 6.5 per cent. It implies that, as Britain's population ages and makes increasing demands on the NHS and state pensions, governments will have to make even more painful decisions on public services and taxation in the decades ahead than so far envisaged. The Chancellor, Alistair Darling, currently plans a tightening of 6.4 per cent of GDP by 2017. The Commission's time horizon stretches to the middle of the century.
The existing crisis in Britain's public finances will be exacerbated by long-term population and social trends, says the Commission: "To put public finances on a sustainable path, the United Kingdom should improve its structural primary balance in a durable manner by 12.4 per cent of GDP. In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate the projected increase in age-related expenditure."
Simply to stabilise the current levels of public debt will require an adjustment of 8.8 per cent of GDP. "The dramatic size of the structural primary deficit poses an additional risk…The UK appears to be at high risk with regard to the long-term sustainability of public finances. Although the contribution of an ageing population is not among the most problematic, the UK's budgetary position poses severe risks to the sustainability of public finances."
Ignominiously for ministers, Britain is placed in the same sin bin of fiscal profligacy as the Czech Republic, Cyprus, Ireland, Greece, Latvia, Lithuania and Romania. The Commission says that by next year four EU members—France, Hungary, Portugal and Britain—will have debts between 80 per cent and 100 per cent of GDP.