UK gets austerity 'reality check' after latest fiscal report

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The latest report from the U.K.'s Office of Budgetary Responsibility (OBR) showed that despite the "austerity rhetoric", the government is nowhere near its deficit reduction targets, one analyst said on Wednesday.

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Among other concerns, the OBR's annual fiscal sustainability report flagged a £47 billion ($71 billion) deterioration in public pension liabilities, which Ross Walker, a senior U.K. economist at Royal Bank of Scotland, said should provide Chancellor of the Exchequer George Osborne with a "reality check". He warned that the deterioration was a "sizeable increase" and should serve as a reminder that the government is far from resolving the nation's fiscal issues.

The OBR said it expected debt to peak at 85.6 per cent of GDP in 2016, before falling back to 66 per cent in the early 2030s, as the economy grows.

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"Is it creating problems for George Osborne?" asked Walker. "No, not really, because he is probably not going to be Chancellor after the next election. But it is relevant because it serves to remind Westminster that despite all the austerity rhetoric, we are nowhere near addressing long term structural and fiscal problems."

The OBR said that some £19 billion ($29 billion) of spending cuts or tax hikes needed to be made, if the U.K.'s debt-to-GDP ratio is to return to its pre-crisis level of roughly 40 percent in 50 years' time. Without this action, national debt could exceed GDP in the decades to come.

The organization added that the U.K.'s public finances would likely come under further pressure over the longer-term, as the population ages. "In the absence of offsetting tax increases or spending cuts, this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory," the report said.

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Osborne pledged last week to meet his deficit reduction targets without making tax hikes. Instead he hopes to extend his austerity measures beyond the next general election, and push through a further £23 billion ($35 billion) of budget cuts, on top of the £105 billion ($159 billion) already made.

"Tax increases are not required… It can be achieved with spending reductions," Osborne told the U.K. Parliament's Treasury Committee last week. The independent Institute for Fiscal Studies said in June that taxes will need to rise by £6 billion ($9 billion) after 2015 to meet the government's targets.

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However, Walker forecast that no further cuts would take place before the next election.

"We need further cuts and higher taxes, but we have an election in 2015, so I don't expect anything will get done about this before then. Every government will pay lip service to this sort of analysis and claim something needs to be done, but won't actually do very much," he said.

Nonetheless, the International Monetary (IMF) praised the U.K.'s commitment to medium-term fiscal consolidation, in a news release published on Wednesday.

"Significant progress has been made toward reducing fiscal risks, notably through front-loaded consolidation... Current fiscal plans envisage additional discretionary fiscal tightening of £10 billion [$15 billion] in 2013/14, and will result in an acceleration of the pace of structural consolidation," the IMF said.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave