OECD predicts decades of austerity lie ahead for UK

THE UK faces decades of more austerity in order to bring its spiralling debt under control and offset any impact on growth, influential think tank the Organisation for Economic Cooperation and Development (OECD) has warned.

The Paris-based group calculates annual spending cuts and tax rises amounting to eight per cent of GDP a year – an estimated £120bn annually – for the next forty years are required by the UK in order to reduce debt to what it calls a “prudent level”.

The OECD recommends that all its 34 developed country members slash debt to 50 per cent of GDP by 2050 – giving them room to respond to future crises and preventing debt restricting growth – a level which it deems happens at 70 per cent of GDP.

Its analysis indicates the UK will have to suffer far worse cuts than many of its Western counterparts with only Japan, New Zealand, the US, Luxembourg and Ireland facing more severe cuts.

It warns that the problem will be exacerbated as countries start to unwind emergency measures put in place at the height of the financial crisis. In the UK, where interest rates remain at their historic low of 0.5 per cent, it warns of a potential “snowball” effect whereby an increase in rates will see an equivalent jump in debt servicing costs and a consequent increase in public debt levels, if action is not taken.

Average interest payments for OECD member countries were 2.5 per cent of GDP in 2007, but the think tank says this could almost double to four per cent by 2026.

“In the absence of corrective action, higher interest rates could lead to substantial increases in debt, particularly in high debt countries such as Japan and Greece but also for those countries running large structural deficits such as the UK, Ireland, New Zealand and the US,” it says.

However, the OECD warns that cuts should be implemented gradually so as not to retard growth.

Its recommendations for reducing debt levels include public health reform and reductions in public sector wages to bring them in line with those in the private sector, as well as the introduction of a sales tax on financial services, and removing tax relief in some areas.