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On Monday, a part of the pre-Budget report that normally attracts the interest of only the most dedicated of policy wonks will be subject to more than usual attention: the chancellor’s long-term projections on the sustainability of the public finances.
Gordon Brown has only himself to thank for that. It will be pored over to see if the chancellor has changed his past assumptions – as he seemed to suggest he might in his recent leaked letter to Lord Turner, chairman of the Pensions Commission. Will he now assume, as the letter seemed to imply, that after 2008 the means-tested pension credit will rise only in line with prices, not earnings?
The effect of that would be two-fold. It would make last week’s Pensions Commission proposals look far more expensive than they otherwise do: costing an extra 2 per cent or more of gross domestic product in 2050, rather than the mere 0.5 per cent or so that Lord Turner has otherwise been able to assume.
It would also have the remarkable effect, as early as 2020, of cutting the relative living standard of today’s poorest pensioners by about a quarter. That is a draconian policy that would bring such opprobrium down on the chancellor’s head that we can be pretty sure he will not do it.
Instead, the figures will, almost inevitably, show another upward tick in future forecasts of public expenditure. That will happen because since the last report in 2004, the government actuary has produced yet another upward revision of life expectancy. As a result, the government’s projections for overall spending on pensions, and (whisper it) on those controversial pensions for public sector workers, are likely to have risen.
But the focus in recent weeks on pension spending will also raise broader questions about how credible the overall forecast of public expenditure is for the long term. The answer is, not very. In the last report, it showed spending rising as a share of national income from just under 41 per cent of GDP in 2003-04 to just over 43 per cent by 2050.
The pension numbers projected a mere 10 per cent increase in spending over a period when the number of people past current state pension age will shoot up by 50 per cent: implying a massive cut in taxpayer support for pensioners.
And in the two other areas where public spending is not merely affected by demographics but driven by them – health and social care – the figures are no more credible. They show National Health Service spending rising from 7 per cent of GDP to 9.5 per cent by 2050, when in fact it will have reached close to 9 per cent, on current plans, by 2008.
Spending on the health service will not go on rising at its current record rate after that date and nor should it. But it will go on rising, driven by the twin effects of an ageing population and medical advances.
Even if it returns to the long-term trend since 1948 of a 3 per cent real increase per year, that would add about 1.5 to 2 per cent of GDP to health spending by 2050. And while the likely path of social care spending is even harder to project – there is deep uncertainty about the numbers available to care for “free” as family structures change – it too will be upwards.
It should be said, loudly and clearly, that projections out to 2050 are subject to massive uncertainty. Projections of life expectancy are just that – projections. They come with huge variations around the central case. And if having babies suddenly came back into fashion, a small increase in fertility would have quite a large effect on the numbers (although not for 20 years or so as children are a net cost to the taxpayer while in education).
But given the demographics, it is simply not credible that public expenditure will rise only by 3 per cent of GDP over the next 50 years without massive policy change.
More likely is that over the next 25 years or so, there will be huge pressures to spend about another 4 or 5 per cent of GDP on those areas of public spending most affected by the changing age structure of the population: on pensions, health and social care.
That would take public spending up to close to 50 per cent of GDP. That is a figure that some will regard as in some way “unaffordable”. Others will point out that it is a level of spending that Scandinavian countries have lived with (and prospered on) for years.
A debate about which view is right is one we should be having. The Treasury’s forecasts of long-term spending, however, do nothing to encourage it.
The writer is FT public policy editor
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