Today's announcement of the government's legislative programme fails to address major long-term funding issues. Ministers need to reconsider the 'triple lock' on pensions and the ring fencing of the NHS budget
Much of the reaction to today’s Queen’s Speech will focus on immigration changes and the dropping of initiatives like plain cigarette packaging. But this risks losing sight of the bigger picture – whether the programme outlined today will help bring down the cost of pensions and begin a debate on the future of NHS funding. And on these grounds the programme was a mixed bag.
Today’s programme should be seen in the context of important demographic changes taking place. Not only is there a large bulge in the population reaching retirement age but people are living longer. Obviously this is good news. But it does also have far-reaching consequences. As Reform has shown, a person who retires at 65 now would have a 16% chance of spending at least three decades in retirement. A person who retires at 65 in 2035 would have much higher chance at 26%.
One consequence is that pension reforms must lower costs. The single-tier pension outlined today will not save money until the 2040s, although National Insurance Contributions will be higher. Indeed, the system as a whole has been made more expensive by earlier promises that pensions will increase over time according to a triple lock, which is the highest of earnings, the CPI or 2.5%.
Reform has estimated that the triple lock will add around 0.7% of GDP to the cost of pensions by 2040. This is equivalent to around £11bn in today’s money. The government should reconsider whether it can continue to afford this promise.
The proposed cap on long-term care costs should help strengthen the market and mean people have more options for help. Yet there are real concerns over whether these reforms will be made to work by their implementation date of 2016. The Coalition needs to show it can get a grip on the implementation of these reforms – such as how the deferred payment scheme will work, how local government will meter contributions and what the cap will cover (eg not hotel costs).
The speech was silent on how the NHS will be made more affordable. Office for National Statistics data show that the NHS accounts for 95% of all of the spending on benefits in kind on the average retired household. Yet the ring-fencing of the NHS's budget means it has failed to benefit from the pressure to innovate and change, and the squeeze on other areas of spending, such as adult social care, has had to be deeper.
It is time to debate new ways of bringing private money into the health system. As the Organisation for Economic Co-operation and Development has noted, on average, OECD countries spend 2.7% of GDP on private healthcare, while in the UK this is just 1.6%.
The programme outlined today contains many good features, including the on-going commitment to deficit reduction. Yet the overall impression is one of a missed opportunity.
It is possible to build a welfare state that not only provides for all citizens but also future-proofs the economy against government deficits and debt. But this will not come from continuing to protect major entitlements. The government needs to show more willingness to think the unthinkable on the welfare state.
Dr Patrick Nolan is the chief economist at the independent think tank Reform. He is the co-author of the Reform report Seismic shifts in the welfare state
