Presentation made by at the 16th Annual OECD Accruals Symposium held at the OECD Conference Centre, Paris, on 21-22 March 2016.

1. How the OBR uses WGA for long-
term sustainability analysis
Presentation
16th Annual OECD Public Sector Accruals Symposium
22 March 2016
Philippa Todd
UK Office for Budget Responsibility (OBR)

2. Outline of presentation
1) What is the OBR? - see Appendix
2) OBR approach to analysing sustainability in the long-term
3) OBR analysis of the Government’s balance sheet
4) OBR’s assessment of the UK’s long-term fiscal sustainability
– see Appendix
5) Future developments – see Appendix
Given the limited time available for this presentation and
the subsequent discussion on this topic, the presentation
at the OECD Symposium will only cover items 2 and 3
but items 1,4 and 5 are in an Appendix. 2

3. 2) OBR approach to analysing sustainability
in the long-term
“The OBR will produce an annual sustainability report. This will
include long-term projections for the public finances and an
assessment of the public sector balance sheet.” (Charter for
Budget Responsibility, 2010 & 2014 & 2015)
• The OBR publishes an annual Fiscal sustainability report
• This uses a two fold approach:
• We look at the fiscal impact of past government activity
– Assets and liabilities on the public sector balance sheet
– Different measures of total public sector net liability in the National Accounts
and the Whole of Government Accounts (WGA)
• And we look at the fiscal impact of future government activity
– 50-year projections of spending, revenues and financial transactions
– Shows possible budget deficits and net debt
– Judge sustainability and any need for tightening
3

4. The fiscal impact of past government activity:
public sector balance sheets
National Accounts Whole of Government Accounts
• Follow internationally agreed
national accounting frameworks,
eg ESA 10.
• Follow internationally agreed
commercial accounting standards, eg
EU-adopted IFRS.
• Statistical series are consistent over
time, with revisions accrued to
relevant years.
• Each year’s accounts use latest
accounting rules; some historical
revisions accrued to the latest year.
Series not readily comparable over
time.
• Covers all sectors of the economy • Covers public sector only.
• Used by the UK Government and
International institutions (eg IMF,
OECD, European Commission) to
assess economic and fiscal
outlook.
• Also used by the UK Government to
control risks, support decision-making
and help manage the use of assets in
delivering public services.
• Balance sheet includes past
liabilities from past activities.
• Balance sheet includes past and future
liabilities incurred from past activities.
• EU member states being required
to publish more detail on potential
• Accounts include loads of details of
potential liabilities that are off balance
Two types of public sector balance sheets in the UK:

5. The fiscal impact of past government activity:
public sector balance sheets
National Accounts Whole of Government Accounts
• Follow internationally agreed
national accounting frameworks,
eg ESA 10.
• Follow internationally agreed
commercial accounting standards, eg
EU-adopted IFRS.
• Statistical series are consistent over
time, with revisions accrued to
relevant years.
• Each year’s accounts use latest
accounting rules; some historical
revisions accrued to the latest year.
Series not readily comparable over
time.
• Covers all sectors of the economy • Covers public sector only.
• Used by the UK Government and
International institutions (eg IMF,
OECD, European Commission) to
assess economic and fiscal
outlook.
• Also used by the UK Government to
control risks, support decision-making
and help manage the use of assets in
delivering public services.
• Balance sheet includes past
liabilities from past activities.
• Balance sheet includes past and future
liabilities incurred from past activities.
• EU member states being required
to publish more detail on potential
• Accounts include loads of details of
potential liabilities that are off balance
Two types of public sector balance sheets in the UK:

6. PAST FUTURE
ASSETSNETLIABILITIES
Physical assets
Illiquid financial assets
Liquid financial assets
All net liabilities accumulated
to date
Future assets
Future revenues
Future liabilities incurred in the
future
Future liabilities incurred
from past activities
Contingent (i.e. potential)
liabilities
OBR frameworks for assessing long-term sustainability:
public sector balance sheets: PSND (National Accounts)
National Accounts: Public Sector Net
Debt

7. PAST FUTURE
ASSETSNETLIABILITIES
Physical assets
Illiquid financial assets
Liquid financial assets
All net liabilities accumulated
to date
Future assets
Future revenues
Future liabilities incurred in the
future
Future liabilities incurred
from past activities
Contingent (i.e. potential)
liabilities
OBR frameworks for assessing long-term sustainability:
public sector balance sheets: PSNW (National Accounts)
National Accounts: Public Sector Net Wealth

8. PAST FUTURE
ASSETSNETLIABILITIES
Physical assets
Illiquid financial assets
Liquid financial assets
All net liabilities accumulated
to date
Future assets
Future revenues
Future liabilities incurred in the
future
Future liabilities incurred
from past activities
Contingent (i.e. potential)
liabilities
OBR frameworks for assessing long-term sustainability:
public sector balance sheets: WGA
Whole of Government Accounts

9. Why don’t we use WGA data to assess long-
term fiscal sustainability?
• The balance sheet only shows the fiscal impact of past
government activity
• WGA does not give statistical time series that are
consistent over time. But it does show future costs of
past government activity.
• But to assess sustainability in the long-term, you also
need to assess how demand for spending will change
with projected population changes, and
also the extent to which the total future
spending will be met by future tax revenues

10. From stocks (balance sheet) to flows (long-
term flows analysis in OBR FSR)
• Provisions and contingent liabilities are useful
risk indicators and cross-checks
• PSND, PSNW and WGA might suggest
government is bust
• But they omit future flows from future activity:
– Future spending on public services and
transfers
– Future tax revenues
• So look at 50 year flow projections to
judge sustainability

11. PAST FUTURE
ASSETSNETLIABILITIES
Physical assets
Illiquid financial assets
Liquid financial assets
All net liabilities accumulated
to date
Future assets
Future revenues
Future liabilities incurred
from past activities
Contingent (i.e. potential)
liabilities
OBR frameworks for assessing long-term sustainability:
long-term flows analysis in OBR FSR
Long-term flows analysis in OBR Fiscal Sustainability Report
Future liabilities incurred in the
future

12. Results from OBR 2015 FSR:
long-term trend for PSND
-60
-40
-20
0
20
40
60
80
100
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP
Constant primary balance
Central

13. 3) OBR analysis of the Government’s
balance sheet
• Normal focus is on public sector net debt
• But also information from WGA:
– Prepared under commercial accounting rules
– Broader coverage than public sector net debt
– Includes illiquid assets, public service pensions, PFI,
provisions and (in notes) contingent liabilities
– Latest version for 2013-14 (2014-15 published soon)
• We now have 5 years of WGA data, and so we
can see how the future costs of past activity
are changing

14. Public sector net debt and net worth
Forecast
-40
-20
0
20
40
60
80
100
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Percent
PSND March 2014 EFO
PSND March 2015 EFO
General government net worth (ESA10)
PSNW: FSR 2014 outturn and forecast
Source: OBR, 2015 FSR

15. General government net debt (IMF)
Source: April 2014 WEO

16. From net debt to WGA net liabilities
£ billion 2013-14
Public sector net debt 1,402
Remove:
Network Rail -34
Add:
Public service pension liabilities 1,302
Provisions 142
Capital liabilities for PFI 33
Fixed assets -808
Financial assets and equity -141
Other -45
WGA net liabilities 1,852

17. From net debt to WGA net liabilities
£ billion 2012-13 2013-14 Change
Public sector net debt 1,299 1,402 103
Remove:
Network Rail -34 -34 -1
Add:
Public service pension liabilities 1,172 1,302 130
Provisions 131 142 11
Capital liabilities for PFI 32 33 1
Fixed assets -794 -808 -14
Financial assets and equity -148 -141 8
Other -30 -45 -15
WGA net liabilities 1,628 1,852 224

18. Public service pension liabilities in WGA
• Public service pension liabilities rose by £130 billion in 2013-14
• Includes:
• £23bn from lower discount rate
• £61bn from adjusting assumptions to outturns
• £46bn other, including interest on net liabilities

19. PFI capital liabilities
• If all PFI had been financed through conventional debt
finance PSND could be 2% of GDP higher.
• Government setting PFI total spending limit of £70bn
from 15-16 to 19-20: £52bn as of March 2014

20. “Trends” in provisions and
contingent liabilities in WGA
• Provisions steadily increasing, particularly for nuclear
decommissioning and clinical negligence
• Remote contingent liabilities falling as various financial stability
schemes from the financial crisis reach their end
• Contingent liabilities rise and fall with differing classifications in each
year’s accounts

21. Contingent liabilities in WGA
• Oil and gas field decommissioning reclassified in 2012-13, with
smaller amounts included as a provision, and the rest unquantifiable
• Supporting international organisations reclassified, so
became a remote contingent liability (again) in 2013-14

22. Longer-term provisions mounting
0
10
20
30
40
50
60
70
80
90
100
Within
next year
Within
5 years
After
5 years
£billion
2009-10 WGA
2010-11 WGA
2011-12 WGA
2012-13 WGA
2013-14 WGA

23. WGA points to spending pressures
• Provisions up from £131bn at end March 2013 to
£141.8bn at end March 2014.
– Nuclear decommissioning up £7.6bn to £77.5bn,
mostly thanks to Sellafield – clean-up likely to be
longer and more expensive. Further increases
likely when NDA finishes work.
– Clinical negligence up £2.9bn to £26.6bn.
Unprecedented number of new claims as
legislation seen likely to lower lawyers’ fees.
These account for a third of negligence costs.

24. New contingent liabilities and risks
• Various policy measures may create WGA
contingent liabilities and guarantees in the future
– Including various guarantee schemes
• Many are likely to be ‘remote contingent liabilities’
• But chances of crystallising correlated, especially if
housing and financial sector downturn
• Change in risk/pressure profile: away from financial
interventions towards nuclear decommissioning and
clinical negligence

25. Financial crisis and the balance sheet
• Gap between PSND including and excluding public
sector banks has narrowed from £1.5 trillion in 2008
to £0.3 trillion as balance sheets shrink and Lloyds
Bank reclassified to the private sector
• Crisis related contingent liabilities down to £0.3bn
from £9.9bn a year ago (as Royal Bank of Scotland
contingent capital facility withdrawn)
• PSND falling in 2015-16 as £20bn of crisis-related
assets to be sold. But swapping one asset for
another, so little impact on WGA net liabilities
• Biggest fiscal hit via potential GDP

26. Appendix
1) What is the OBR?
4) OBR’s assessment of the UK’s long-term fiscal sustainability
5) Future developments
26
Items 1), 4) and 5) included in this Appendix for
background, because we can’t cover these at the
OECD symposium in the time available.

27. 1) What is the OBR?
• We are the UK’s official independent fiscal institution
• We were created in 2010 to provide independent and
authoritative analysis of the public finances
• Our role is set out in legislation, which asks us to:
1) produce the official economic and fiscal forecasts
2) assess the Government’s performance against its fiscal
targets
3) assess the long-term sustainability of the public finances
4) evaluate fiscal risks
5) scrutinise the Government’s policy costings

28. What is the OBR?
• We are the UK’s official independent fiscal institution
• We were created in 2010 to provide independent and
authoritative analysis of the public finances
• Our role is set out in legislation, which asks us to:
1) produce the official economic and fiscal forecasts
2) assess the Government’s performance against its fiscal
targets
3) assess the long-term sustainability of the public finances
4) evaluate fiscal risks
5) scrutinise the Government’s policy costings

29. Core outputs of the OBR
http://budgetresponsibility.org.uk/

30. 4) OBR’s assessment of the UK’s
long-term fiscal sustainability:
OBR long-term projections

31. The ageing population (2012 based)
24 19 17
52
52
46
12
11
11
11 16
19
1 2 7
0
10
20
30
40
50
60
70
80
90
100
PercentofUKpopulation
85+
65-84
55-64
16-54
0-15
1961 2015 2065

32. The ageing population (2014-based)
-100
-50
0
50
100
150
200
250
Aged 0-15 Aged 16-50 Aged 51-SPA Aged SPA+
Thousandsofpeople
2015 2016
2017 2018
2019 2020
Source: ONS

33. Revenues and public spending by age
0
5
10
15
20
25
30
1 11 21 31 41 51 61 71 81 91 101+
Receipts/spendingin2019-20(£
thousand)
Age
Receipts
Public services and welfare

34. Revenue and spending projections
32
34
36
38
40
42
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP
Primary spending
Primary receipts

35. Age-related spending in the EU
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Croatia
France
Greece
Italy
Latvia
Estonia
Cyprus
Denmark
Portugal
Spain
Sweden
Finland
Ireland
EU
Romania
Bulgaria
Poland
UK
Lithuania
Czech Rep
Hungary
Austria
Slovakia
Belgium
Germany
Netherlands
Luxemburg
Norway
Malta
Slovenia
Per cent of GDP
Projectedchangeinagerelatedspending(2020-2060)

36. Primary budget balance
-4
-3
-2
-1
0
1
2
3
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP

37. Long-term PSNB projections
-6
-5
-4
-3
-2
-1
0
1
2
2014-
15
2024-
25
2034-
35
2044-
45
2054-
55
2064-
65
Publicsectornetborrowing,inverted
(percentofGDP)
March
EF0
June
FSR

38. Public sector net debt
-60
-40
-20
0
20
40
60
80
100
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP
Constant primary balance
Central

39. Sensitivity analysis
• Considerable uncertainty around 50 year projections
• Outlook for debt would be worse if:
– Primary surplus at end of EFO forecast smaller
– Population structure older
– Long run interest rates higher relative to long run growth rates
– Health spending had to rise to offset weak productivity growth
– Health & education spending move with demographics from 2015-
16 onwards

40. 18/03/2016
EFO forecast FSRprojection
40
50
60
70
80
90
100
110
120
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP
Low net migration High net migration
Old age structure Young age structure
Central
Source: OBR
Sensitivity to demographic variants

41. 18/03/2016
Lower productivity in the health care sector
EFO forecast FSRprojection
40
60
80
100
120
140
160
180
200
2014-15 2024-25 2034-35 2044-45 2054-55 2064-65
PercentofGDP
Annual health care productivitygrowth of 1.1 per cent
Central
Source: OBR

42. Achieving sustainability
• Fiscal gap: PSND of 40% of GDP in 2064-65
– Permanent tightening of 1.1% of GDP (£20bn) from 2020-21
or 0.4% of GDP each decade in central scenario
• Slightly more than last year
– Permanent tightening of 3.3% of GDP from 2020-21if per
capita health spending rises 3.3% a year in real terms to
compensate for likely weakness of productivity growth

43. Timing the response: one-off
0
20
40
60
80
0
1
2
3
4
2020-21 2030-31 2040-41 2050-51 2060-61
PercentofGDP
PercentofGDP
Adjustment (LHS) PSND (RHS)

44. Timing the response: decade by decade
0
20
40
60
80
0
1
2
3
4
2020-21 2030-31 2040-41 2050-51 2060-61
PercentofGDP
PercentofGDP
Adjustment (LHS) PSND (RHS)

45. 5) Future developments
• From 2017, the OBR will draw together and expand its
various analyses of risks and uncertainties in a new,
dedicated Fiscal risks report
• In October 2015, the UK Parliament approved a
revised Charter for Budget Responsibility that requires
the OBR to produce the fiscal risks report at least once
every two years, and requires the Government to
respond to it formally within a year of publication
• The OBR plans to publish a discussion paper later this
year (2016) setting out the potential scope of the new
Fiscal risks report