The issues raised by today's public sector pension disputes require much more radical action than the government is proposing
Today’s strikes over public sector pensions and Monday’s release of the Dilnot report on the funding of long term care should be judged against the challenges posed by the ageing population.
Every GCSE pupil is familiar with demographic charts and everyone knows that the population is ageing. But from a social policy perspective people talk about solutions as something for the future. They are wrong to do so.
Population ageing is not a distant issue for 2040 or 2050 but is taking place now. ONS data show that between 2011 and 2016 alone the number of people aged 65 and over will rise by 1.4 million, while the numbers of workers under 50 will, in contrast, fall. Spending in areas like pensions, health and care is accelerating as the share of the population who fund this spending is falling.
Indeed, as Reform has calculated in a report released yesterday, annual expenditure on retirement pensions is projected to increase by around 2.1 per cent of GDP by 2041 (around £32 billion in today’s money), and expenditure on the NHS and care is projected to rise by around 2.6 per cent of GDP by 2041 (around £40 billion in today’s money).
Further, while total public spending will fall as a share of GDP until the end of this parliament, it will begin to rise quickly in the middle of the next parliament. Taxation as a share of GDP will rise steadily, but less quickly than the increase in spending. As a result, the deficit in the public finances will fall by the end of this parliament but begin to rise quickly before the end of the next parliament.
This suggests that even if the coalition achieves its target of eliminating the deficit in this parliament, significant structural reform will still be required to contain long term costs. Efforts to rescue the public finances will have failed the real test. Without reform, governments will not run the surpluses required to stabilise debt and so will risk ending in a debt spiral. This is even before account is made for the dynamic, depressing effects of higher tax burdens.
This will take place against a background of a changing international environment where old and indebted countries like the UK struggle to remain competitive. Many of the fast growing and dynamic Asian economies, for example, will not face the cost of expensive welfare states and high taxes. (Indeed, the centre of gravity in the world is already changing with the Asia-Pacific region now having more millionaires than Europe.)
Ministers may argue that they have taken steps to reduce the fiscal burden of pensions by, for example, bringing forward the increase in the retirement age. This change, however, only achieves a temporary pause in the growth in the number of retired people. After the end of the next parliament, the number of retired people will grow again at the same rate as before the changes. The coalition government has also committed to policies that entirely negate any fiscal benefits of the later retirement ages: increasing the basic state pension in line with earnings and financing the NHS exclusively from the taxpayer.
This means that the government has to rethink its commitments on the state pension, to continue to pay the Winter Fuel Allowance to every pensioner and to keep the NHS free at the point of care. It also means that people must be encouraged to make greater provision for their own futures (especially in areas like long term care), rather than looking to the state. But, most of all, it means that we should not lose sight of the importance of lifting long run economic growth, as this will play an essential role in providing funds for repaying government debt, reducing tax burdens or increasing spending on public goods and services.
Dr Patrick Nolan is chief economist at the Reform think-tank
