This is the dawning of the Age of Austerity

At least, that’s the impression you’d get from reading the coverage of the Fiscal Sustainability Report, published yesterday by the Office for Budget Responsibility.

Actually, the OBR’s forecasts are not as pessimistic as some of the others I have covered on this blog. The OBR thinks the costs of aging will remain more or less the same, as a percentage of GDP, between now and 2030.

That’s an improvement on the forecasts in the Dilnot report, published last week, which estimated that age-related costs would add 2.6 percent of GDP to public spending by 2030. These figures were taken from the OBR’s Economic and Fiscal Outlook, published last November.

Even these were less pessimistic than some others.

Increase in age related spending as percentage of GDP (2009-10 to 2029-30)

Source Projected increase (% GDP)
Dilnot Report/OBR

2.6

European Commission Sustainability Report

4.4

Standard and Poors

4.4

Prof Howard Glennerster/ 2020 Public Services Trust

4.4

E&Y/2020 Public Services Trust (Low GDP Growth Scenario)

5.9

There may, of course, be other forecasts. These are just the ones I happen to know about.

The figures vary slightly in each report, indicating that they are perhaps working from different definitions, but the overall picture is similar.

Even so, whether it is 2.6, 4.4 or 5.9 percent, it still has to be paid for by additional borrowing, tax increases or spending cuts elsewhere, all at a time when other pressures, such as climate change, will be hitting the public purse too. In its worst case scenario, the 2020 Trust has public spending rising to almost 52 percent of GDP by 2030. That’s less than 20 years away.

However, the latest OBR projections do not see the impact of these pressures significantly raising the UK’s public spending, and therefore its debt, until towards the end of the next decade, suggesting that we have more time to fix things than the other scenarios indicate. If we continue with current policies, says the OBR, we might even get our debt back down to 60 percent of GDP by the middle of the next decade before it starts creeping up to reach 107 percent in 2060.

 Projection of Public Sector Net Debt

Which brings us back down to Earth with a bump. Remember, we still, in theory, have an agreement with our EU partners not to let public debt rise above 60 percent. This has been ignored by the major economies since the financial crisis. The OBR’s forecasts reckon that, without further cuts or tax rises on top of those already proposed by the government, the best we can hope for is to briefly get the debt back to the EU limit, sometime in the next decade, before it goes shooting up again.

Arguments will rage about how much the state can afford and how much people should pay towards their care. What is clear from just about every forecast, though, is that our aging population is going to add significant amount to the cost of social care.

Colin Talbot raised an interesting question last time I discussed this subject:

If we have an increasingly large segment of the population dependent on pension incomes (both public and private sectors), and that income is steadily eroded, what is the economic impact? I assume it will act like a giant sheet anchor on the economy, slowing trend growth as a large, poor, group spends less and less.

In recent years, the grey pound has become an increasingly important part of the UK economy. But what happens when these affluent pensioners die off to be replaced with a new generation with lower or non-existent pensions? Not only will the population be older but the old people will be poorer. This, as Colin says, will act as a drag on economic growth, reducing our tax revenues and worsening our debt to GDP ratio.

The growth projections in the OBR report see the UK economy chugging along with growth of somewhere between 2 and 3 percent for the next half-century. Even the higher forecasts, which assume that higher birth rates and immigration can mitigate the overall aging of British society, still fall short of the growth we achieved in the 1990s. Aging societies do not have high growth rates. The only way to prevent what Professor Talbot calls the “giant sheet anchor” is for elderly people to stay economically active and work for as long as they can.

Table 3.3: Real GDP growth under variant population projections

Looking at all this, it’s hard not to conclude that the boomers have had the best of it. They had the free education, good pensions and the state-funded jobs or private sector ones which paid out equivalent benefits. Those of us born after 1958 are seeing our state pensions recede further into the distance and wonder if our occupational ones will ever pay out at all. The welfare state has peaked. Historians will see it as a blip, enabled by the extreme wealth of a small number of countries during a relatively short period.

The fiscal projections may vary but it is clear that, by sometime during the next decade, the pressure on our public finances will be severe. Perhaps calling the next few decades the Age of Austerity is a bit pessimistic but, compared to what we have been used to, it will be an age of higher taxes, higher public debt, higher retirement ages, lower welfare entitlement and less comprehensive public services.

If we plan for it now, we may be able to mitigate some of the pain. We need to find new ways to deliver public services in a time when there will be less money available. Governments need to be honest about how much more tax we will have to pay and how much less we will get for it.

The big task of task of this decade, more important than anything else, is to design a state that can cope with the next two. That state will need to be very different from the one we’ve got now.

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3 Responses to This is the dawning of the Age of Austerity

  1. Taking things a stage further, perhaps we can expect life expectancies to decline once more some way down the line, as the older but poorer generation grapples with the harshest realities of reduced living standards, perhaps creating conditions for a potential second historical “blip” of “extreme wealth” in a century or two’s time (resulting in a new upturn in life expectancy, and ushering in a whole new cycle such as we are seeing now)?

    So there’s always a silver lining!

    Michael

    • Rick says:

      I think there could be something in what you say Michael. Poorer pensionsers probably won’t live as long so some of this may even itself out in the end. The extreme wealth was, I think, the result of the West’s industrialisation. Once the world rebalances, it is unlikley that so much of its wealth will be concentrated in so few places again.

  2. Pingback: This is the dawning of the Age of Austerity - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

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