Office for Budget Responsibility report suggests UK will continue to pay the price for an ageing population and declining tax levels

Britain must brace itself for decades of austerity, even after enduring chancellor George Osborne's spending squeeze, to pay the price for an ageing population, according to the independent Office for Budget Responsibility (OBR).

The OBR, which was set up by the chancellor to produce independent projections of the public finances, says in its report that the rising cost of health care and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.

Without fresh tax rises or spending cuts, the OBR says, the government's debt will hit a trough of 60% of gross domestic product (GDP) in the mid 2020s, compared with below 70% now, before rising rapidly to hit 107% by 2060-61.

Although the deterioration in the public finances is more than a decade away, the OBR is urging politicians to make long-term decisions now, to prevent the economy drifting into a debt crisis as the population ages. The warning is expected to receive a warm welcome inside the Treasury, which has moved quickly since the coalition took power to limit escalating pension and health bills.

Osborne is known to have stressed during the comprehensive spending review last year that ministers should limit future spending commitments. However, pensions minister Iain Duncan Smith has won approval for a flat rate £140 a week pension that could add billions of pounds to the state pension bill. The chancellor is also battling to save plans to raise the state retirement age – a move that will penalise women in their 50s. There has been a concerted campaign to force the government into a U-turn.

The OBR also appeared to undermine the Treasury's delicate negotiations with public sector unions that claim extra cuts in public sector pensions are unwarranted. The fiscal watchdog revealed figures showing retirement costs declining over the next 50 years as a proportion of GDP following the chancellor's decision to uprate them in line with the lower consumer prices index measure of inflation, instead of the retail prices index.

The OBR was clear that in other respects society would be forced to cope with escalating social security and health spending on older members of society.

"Policymakers and would-be policymakers should certainly think carefully about the long-term consequences of any policies they introduce in the short term. And they should give thought too to the difficult choices that will confront this country once the challenge of the current consolidation has passed," the study says.

The OBR's report coincides with the publication of new "whole of government accounts" from the Treasury, which include new – and much larger – estimates of the state's long-term commitments, based on treating the government as though it were a business, with assets and liabilities. The "net present value" of paying public sector pension promises – a way of calculating the cost if they all had to be paid today – had already hit almost 79% of GDP, or £1.1tn, by March 2010, according to the Treasury's calculations.

The price of Labour's private finance initiative – Gordon Brown's favoured method for building new schools, hospitals and infrastructure without the Treasury paying the whole bill up front – is put at £40bn.

Meanwhile, the state's other "contingent liabilities", which the Treasury hopes it will never have to pay, such as guarantees to the crisis-hit banking sector, amount to more than £200bn.

Set against the government's assets, which the Treasury calculates to be worth £759bn, overall public sector liabilities now stand at £1.2tn, or 84.5% of GDP.

Despite these eye-watering estimates, the OBR says the main reason taxpayers must get used to decades of austerity is the rising cost of health care, which will increase from 7.4% of GDP to 9.8% in 2060, and the basic state pension that will cost 7.9% of GDP compared to 5.5% now even without the new flat rate scheme in place.

"Balance sheet measures look only at the impact of past government activity," it says. "They do not include the present value of future spending that we know future governments will wish to undertake, for example maintaining health, education and pension provision.

"Just as importantly, they exclude the public sector's most valuable financial asset: its ability to levy future taxes."