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By Rebecca Clancy | Published Jul 12, 2012

OBR: UK’s long-term fiscal policy ‘unsustainable’

The UK’s long-term fiscal policy is “ clearly unsustainable” in the very long-term, according to the Office for Budget Responsibility (OBR).

The OBR‘s stark warning was published earlier today in its Fiscal Sustainability Report, which suggests that the government’s current programme of austerity measures to rein in its deficits will not prevent the national debt from starting to spiral in the next 50 years.

The report forecast that public sector net debt (PSND) would fall from 74 per cent of gross domestic product (GDP), to a “trough” of 57 per cent in the mid-2020s. But in the next 50 years, the OBR said the debt would rise “increasingly quickly” to hit 89 per cent of GDP in 2061-2062.

But even as the report was released today yields on the UK’s 10-year gilts dipped to yet another record low, of 1.51 per cent, as investors continued to seek out ‘safe havens’ amid the global economic downturn.

The yield falls come as the status of the UK has a ‘safe haven’ has been called into question of late with increasing speculation that it may be on the brink of losing its top AAA credit ratings.

At the end of June, M&G Investments’ head of retail fixed interest Jim Leaviss said the government’s failure to get its spending down, coupled with a failure to generate growth in the economy, made it increasingly likely the rating would be cut.

In an Investment Adviser feature published on July 2 Andrew Morris, managing director of discretionary fund manager Signature, said the UK’s AAA credit rating may once again be in jeopardy.

“The job of balancing the UK’s books is proving an unpopular challenge for our coalition and I sense life isn’t going to get any easier in the near future. Austerity measures were never going to be popular to implement but against a backdrop of a faltering economy and the scale of the global challenges we are facing, a series of bold measures are being considered,” he said.

“With politics and economics again clashing I believe we are entering a pivotal stage of the debate and one that puts our nation’s AAA status at risk.”

In February ratings agency Moody’s put the UK’s AAA credit rating on a negative outlook, which means there is a 30 per cent chance of the UK being downgraded within 18 months.

At the time Moody’s said that “any further abrupt economic or fiscal deterioration would put into question the government’s ability to place the debt burden on a downward trajectory for fiscal year 2015-16″.

A month later another agency, Fitch, also moved the UK’s AAA rating to negative, meaning there is a 50 per cent change of a downgrade in the next two years.

Since those revisions, the UK’s gross domestic product (GDP) growth estimate for the final quarter of 2011 fell from -0.2 per cent to -0.4 per cent, while the third estimate of economic growth in the first quarter of 2012 has now confirmed the economy shrunk by a further 0.3 per cent, down from the first estimate of -0.2 per cent.

The impact of the extra bank holiday on economic activity now has forecasters expecting a third consecutive negative quarter.

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