Britain faces £50bn tax rises to cover elderly care, warns IMF

Britain faces another £50bn of spending cuts and tax rises to cover the costs of age-related care and put the national debt under control, the International Monetary Fund has warned.

A "second generation" of UK austerity measures, which the IMF suggested should be completed before 2030, would outstrip programmes in both Greece and Portugal. Only the US, Japan and Ireland are facing a larger adjustment among advanced economies.

To bring public debt down from 82.5pc to 60pc of GDP and pay for rising health and pension costs, the UK will need "a fiscal adjustment strategy" over the next 18 years equivalent to 11.3pc of national output, or roughly £170bn, according to IMF estimates. By comparison, the existing £123bn austerity programme is equivalent to 7.5pc of GDP.

Greece and Portugal, both of which have received bail-outs, will need austerity programmes amounting to 10.7pc and 8.1pc of GDP respectively.

The implicit warning of further pension and healthcare reforms and another round of austerity came as the IMF raised its growth forecast for the UK this year from 0.6pc to 0.8pc on the back of the improving world outlook, but warned the global recovery remained "very fragile".

A number of "tails risks" that plunge the world back into crisis persist. An oil price spike caused by political fall-out over Iran could trigger a series of devastating events that would "produce a major slump reminiscent of the 1930s", the Bretton Woods institution said.

In its strongest language yet, it added that a disorderly default in the eurozone was likely to lead to a break-up of the 17-member currency region that "could aggravate economic stress to levels well above those after the Lehman collapse". It added that the economic effect of a break-up was impossible to quantify.

"An uneasy calm remains. One has the feeling that at any moment things could well get very bad again," IMF chief economist Olivier Blanchard said. Despite the vulnerabilities, a "reacceleration of activity" convinced the IMF to lift its global forecast to 3.5pc this year, from its January prediction of 3.3pc, and to 4.1pc from 4pc in 2013.

The IMF also raised concerns about the UK's dangerous dependence on low interest rates to keep the deficit reduction on track. "For many advanced economies – including France, Italy, and the UK – only relatively small shocks to the [interest rate-growth differential] would be sufficient to prevent debt from stabilizing over the medium term," it said.

Government borrowing costs are at record lows at about 2pc for 10-year money, in part thanks to the UK's safe haven status.

Reflecting the scale of the UK's deficit-reduction efforts needed to put the public debt on a sustainable footing, the IMF indicated there was little "fiscal space" to slow down austerity. Mr Blanchard said: "One has the sense that it could have gone at it more slowly but... we've concluded that the degree of fiscal consolidation for 2012 is right."

Instead, the IMF said in reference to countries with a dependence on low rates, as well as the US and Japan: "For many advanced economies, stronger medium-term adjustment efforts could be called for to provide greater assurances about the resilience of the public finances."

The IMF added that UK growth will be weak at the start of this year "before recovering". Its forecast for next year was unchanged at 2pc. However, the improved outlook of 0.8pc remains worse than September's prediction of 1.6pc growth in 2012.

The IMF added that, "should downside risks to the growth outlook threaten to materialise", the Bank of England "can further ease monetary policy" by adding to its £325bn quantitative easing programme.