Pressures and priorities: The long-term outlook for Britain's public finances

Current political debates are dominated by an argument about the impact of austerity on the UK's prospects for economic growth, but these debates rarely stretch to an informed examination of the possible drivers of tax revenues and public spending over the long term, and the political choices implied by these trends. Yet this kind of debate is vital given continued population ageing, technological change and the rising demand for public services generated by growing national prosperity over the long run.

Our analysis is based upon projections by the Office for Budget Responsibility (OBR) of the long-term state of the public finances, which assume that current policy does not change over the next 50 years and that economic growth is steady. The report considers the implications of the OBR's projections for key areas of public spending, sources of uncertainty in those projections, and the possible consequences of variation in long-term demographic change, economic performance and political decision-making.

Projections of long-term fiscal sustainability tell us what will drive rising demand for public spending and what will drive falling revenues. Politicians will choose whether and how to respond to these trends, and have a range of options available to them. The report identifies four key approaches, with implications for policymaking in every area, at every level:

• Raise the long-term rate of growth and the employment rate to help achieve fiscal consolidation and, over the long term, reduce the size of the 'fiscal gap'.
• Increase tax revenues to make up the shortfall in future income and consider if total revenues should be higher in the long term to pay for some of the extra demand for services and benefits.
• Identify priorities for public spending and the trade-offs inherent in different choices.
• Reform public spending to limit rising demand or reduce the cost of public provision, to address cost pressures in public services.