Tax increases or more spending cuts will be needed to reduce national debt in long term, says Office of Budget Responsibility

Britain's age of austerity will last much longer than first thought if the UK is to keep up with the escalating costs of an ageing population, the government's independent economic forecaster has said.

In its annual check, the Office for Budget Responsibility said Britain's public finances were "clearly unsustainable" over the next 50 years, despite George Osborne's round of spending cuts.

Even if the government succeeded in saving £123bn over the next seven years, the OBR said it would need to impose permanent tax increases or reduce spending by 1.1% of GDP – about £17bn in today's terms – to return the national debt to pre-crisis levels.

If the government continued with current policies, and if those policies succeeded, the OBR said public finances would improve until the mid-2020s. But there would still be a long-term deterioration in the decades that follow.

Net public-sector debt is forecast to fall from 74% of GDP in 2016-17 to a low of 57% in the mid-2020s, before rising increasingly fast to reach 89% of GDP in 2061-62. That is an improvement on last year's forecast that debt would reach 107% of GDP by 2061, but the OBR said more still needed to be done.

"On current policy, we would expect the budget deficit to widen sufficiently over the long term to put public-sector net debt on a continuously rising trajectory as a share of national income," the report said. "This is clearly unsustainable."

The stark report by the OBR shows that the spending cuts will last far longer than the chancellor had planned. In his emergency budget in June 2010 Osborne said he hoped to eliminate the structural budget deficit by the time of the next general election.

In his autumn statement last November he announced that, in light of the economy's poor performance, the cuts would have to continue for an extra two years.

Labour said the OBR report highlighted the significance of the chancellor's failure to stimulate the economy after speeding up the Treasury's deficit-cutting plans.

Rachel Reeves, shadow chief secretary to the Treasury, said: "The OBR's report sets out some of the huge challenges facing policymakers over the coming decades, including issues like the rising cost of social care, which this government has so far failed to grasp.

"But the failure of George Osborne's economic plan will make things worse. We are already seeing how the double-dip recession is causing borrowing to go up and an extra £150bn added to the debt. And Britain will pay a very heavy economic and social price if we continue to have years of slow growth and high long-term unemployment. That is why urgent action is needed now to get the economy moving again."

The OBR report highlighted the impact of an ageing population by noting that the over-65s are expected to make up 26% of the UK's population by 2061, compared with 17% now. The OBR put the cost of paying for health, pensions and long-term care at an extra £80bn a year in today's money.

Recent reforms to public-sector pensions had cut costs by £175bn, it added. The bulk of those savings, about £126bn, came from the 2010 decision to make pensions rise in line with the consumer prices index, rather than the retail prices index.

As well as the growing burden of paying for elderly people, the OBR noted that falling North Sea oil production was likely to put pressure on revenues over the next 50 years. "This suggests governments are likely to need to find replacement streams of revenue just to hold the tax burden constant, let alone to meet the upward pressures on spending," it said.

The Institute for Fiscal Studies said the OBR report provided a reminder of the challenge of an ageing population and falling tax receipts in key areas of the economy.

The IFS said: "The OBR's second fiscal sustainability report, published today, reminds us of the significant challenges which we face as a result of the spending pressures created by population ageing and a likely loss of tax revenues from motoring and north sea oil and gas companies. We need to respond to this analysis by planning now for the changes to spending and taxes that will be required."