From the TUC

Paying for the demographic “timebomb”

26 Jul 2011, by in Economics

Many of the headlines generated by the Office for Budget Responsibility’s recent fiscal sustainability report concentrated on the challenges of the demographic “timebomb” – the fact that we are living longer. There will be undoubtedly be extra costs, but there is no need to give in to right wing calls to slash spending.

This is what the OBR chair Robert Chote said at the  launch press conference:

Demographic trends are a key driver of our sustainability analysis, as they are of similar studies in other countries. Past increases in life expectancy and falls in fertility rates, combined with the demographic bulge created by the baby boom, mean the UK will have an ageing population. The fact that people are living longer, and longer in good health, is obviously welcome.

But an ageing population does create fiscal costs. Our analysis is based on the population projections produced every two years by the Office for National Statistics. The scenario of theirs that we use for our central projections has the proportion of the population aged 65 and over rising from 17 per cent this year to 26 per cent in 2061. It also has net inward migration averaging around half its recent levels over the long term.

I’ve constructed this chart from the data in the report to show their estimates of the various costs associated with ageing. (In this post I will make nothing of the declining share taken by public service pensions.)

ageing society costs as share of GDP

The OBR are right to raise this as an issue. Our ageing society does have costs that will have to be met in the future. If spending on other areas does not fall, then either taxes will have to go up or spending on these areas cut back signifcantly over time – (assuming we rule out culling the old, Soylent Green style.)

But this worries the small-state right. As the Spectator blog says:

… it’s encouraging that the OBR is putting these projections into the public domain. The fiscal debate has, for too long, lacked the emphasis on the long-term … Rectifying that should encourage our politicians to concentrate on some of the choices facing them in the years ahead. Are they happy to countenance health spending at 10 per cent of GDP, or do they need to shift more treatments towards the private sector? Can they do more to curtail in rise in pension costs? And so on. “

And it’s easy to find more.

But let’s think a bit more carefully about what the issue is here. There is common ground that we have an ageing society, and that this will result in extra costs. People who live longer will need more health care, pension payments and social care.

If they get this support, the question becomes whether this is best delivered by the public or private sector. In practice there is always likely to be a mixed economy for supporting the elderly. Most health care will be paid for by the NHS, while pensions will be a mix of state, occupational and private as now.Unpaid domestic labour by family carers will continue both to be vital and omitted from such charts.

There is a debate to be had about efficiency in different sectors – though not one progressives need shy away from as the NHS model is consistently shown to be one of the most efficient ways of delivering universal health care. The difference between the 2015 and 2060 OBR  projections  is less than the gap between UK and US spending on health care in 2009.

So if we unpack what the right are saying a bit more carefully we find it is little more than a restatement of their opposition to collectively delivered public services.

Either they are saying the elderly simply shouldn’t get decent health care or access to social care or that it should be delivered inefficiently by the private sector in order to keep tax bills down even though it will still have to be paid for – and cost more.

It’s another example of the private for-profit hospital being seen as a source of economic growth and a dynamic economy, while a public hospital is a drag on the economy, even if they both carry out the same necessary function.

George Osborne can’t last for ever. By 2060 the economy will have significantly grown. It does not seem unreasonable to take a chunk of that growth as resources for providing support for people as they live longer.

But that will also require a shift away from the proceeds of growth being largely grabbed by the super-rich. Nor should we ignore the challenges of how best to raise the tax that will be needed, especially as some parts of the tax base are shrinking.

2 Responses to Paying for the demographic “timebomb”

  1. StevenL
    Jul 26th 2011, 11:41 pm

    Well if you want to raise taxes to pay for it, pensions can start coughing up NI like everyone else then. Put that in your manifesto and see if the greedy old so and so’s smoke it!

  2. Richard Blogger
    Jul 27th 2011, 9:04 pm

    I am quite amazed by some of the arguments from the right. For example, on the World Tonight last Friday there was a discussion about the situation in Spain and the right-wing commentator suggested that the only way to reduce the Spanish deficit would be to cut back on state benefits like free at the point of use healthcare. He suggested that patients should be expected to pay co-pay which would “get more money into the system”. He really didn’t quite understand that whether the money comes out of patients’ pockets at the doctors’ surgery, or out of their wage packets as tax, it all comes out of the same pot of money called the GDP. It is not “new money”, it just comes from different people, and if you have a progressive tax system, it is those who can most afford it who will pay. Co-pay is, of course, one of the worst ways to fund healthcare, because it is effectively a tax on the sick. We get the same arguments here about how NHS care should be funded. The right think that money can be magicked up out of our pockets.

    As to the silly ConsHome comment: “Are they happy to countenance health spending at 10 per cent of GDP” well I wonder if the author realises that the Germans spend something like 12% of GDP on healthcare? If the Germans can afford to spend a bigger proportion (almost half as much again) than we do, and it *still* hasn’t bankrupted them, then perhaps England – with the cost-effective NHS – should be able to afford to spend more.