The Autumn Statement: George Osborne's cautious medicine

Today George Osborne stood up and declared victory. The economy finally appears to be improving after six years of stagnation and rising public debt. However, Osborne still struck a cautious note as he called for "a responsible recovery, where we don't pretend we can make this nation better off by writing cheques to ourselves." The Chancellor's warnings are sensible but he has yet to seriously address the looming challenges.

The Chancellor knows there is still a long way to go before the country gets back on track: the economy lingers 2.5 per cent below its 2007 peak and unemployment remains near double the pre-crisis level at 7.6 per cent. That means UK incomes are a staggering 22 per cent below the pre-crisis trend and, if the recession had not struck, the country would today be richer by £5,400 per person.

The current growth rate of 1.8 per cent is encouraging but is still below the worst quarter in the first seven years of this century. The Office for Budget Responsibility's forecasts of growth have been revised up but still indicate that the UK will never regain the previous growth path.

The public finance figures are similarly shocking. The deficit remains one of the highest in the developed world at 7 per cent of GDP. Incredibly, the UK has not had a Budget surplus for over a decade: the last was recorded in 2001. That has led to rising public debt that already exceeds £1.1 trillion, a level not seen since the aftermath of the World Wars.

The Office for Budget Responsibility now forecasts the deficit to be eliminated by 2018/19, five years hence. That is welcome news but the economic recovery is still fragile and the forecasts are uncertain. The deficit has been forecast to be eliminated within five years in every year since 2002. So far there still has not been a single year of surplus, suggesting that the predictions must be taken with a healthy pinch of salt.

In his speech the Chancellor sensibly emphasised that fiscal responsibility will remain the order of the day for some time to come. He outlined a new Charter of Budget Responsibility to be introduced to Parliament next year, which should set out a replacement for the now-abandoned fiscal rules. That will be crucial in the long run because the fiscal picture has not changed. Over the next 50 years the OBR estimates structural deficits to rise by 4.2 per cent as pensions, health care, and social care costs increase dramatically. Pension costs alone are projected to rise by 45 per cent as a share of GDP.

This Autumn Statement contained welcome hints that the Government is turning its eyes to those costs. Raising the retirement age is a step in the right direction but more will be needed. Responding to the looming costs of demographic change requires broadening the tax base and re-thinking the way we fund the NHS. The Chancellor continues to run scared of the elderly voting bloc. A higher pension age will not affect the current elderly but the young.

As the working-age population shrinks and the elderly population grows the tax base will shrink dramatically. The exemptions to national insurance contributions above state pension age and the tax relief on pensions will become increasingly unsustainable. Just ending the exemption would raise £735 million per year and would only affect the richest 6.3 per cent of people aged over 65. Broadening the tax base and removing age-related exemptions must be at the heart of future reforms to ensure fiscal sustainability.

Unfortunately, measures announced in the Autumn Statement, such as a freeze on fuel duty, green levy relief, and limited rises in business rates all point to further narrowing of the tax base. Similarly, the Chancellor announced a cap on welfare spending but excluded pensions. Pensioner benefits not only account for a third of all welfare spending but are projected to grow faster than any other element. By excluding them the Chancellor has capped the growth of only the spending that was not expected to rise anyway.

The Chancellor may have presented a fiscally neutral Autumn Statement but that is not sufficient. Ed Balls, earlier this year, was right to claim that any serious reform to tackle the demographic problems must include pension reform. George Osborne needs to follow in his footsteps.

James Zuccollo is an economist at the think tank Reform