Two reports about the cost of ageing and its fiscal impact came out last week. The IMF’s Financial Stability Report concluded that the cost of longevity has been consistently underestimated. By 2050, it says, if people are living for even three years longer than current models predict, it would add 50 percent to the estimated costs of ageing. In short, then, governments and pension funds may have got their sums quite seriously wrong. The IMF calculates that, by 2050, the costs of ageing, including healthcare, welfare spending and pensions, will increase by 5.8 percent of GDP in the advanced economies.
The OECD’s report on fiscal consolidation, also out last week, came up with a very similar figure. If current levels of benefits and care are to be maintained, it estimated an increase in age-related spending of 6 percent of GDP by 2050. These figures don’t differ that much from the ones I pulled together from various sources last year. The consensus there was around 4 percent of GDP by 2030, so add another twenty years and 6 percent looks like a reasonable guess. It’s impossible to predict so far ahead with any accuracy but the general consensus seems to be that ageing populations are going to cost a hell of a lot.
The problem, as both reports point out, is that the economies with the highest percentage of oldies are also the ones with the highest public debt levels. The increased costs of ageing, says the IMF could, by 2050, see the UK’s debt rising to 130 percent of GDP, the US and Germany’s to 150 percent and Japan’s to 300 percent!
There will be an improvement in these countries finances over the next few years as their economies start to pick up again but this will be something of a false dawn. Government planners have known for years that they were going to have to face increased ageing costs at some point but few, if any, factored the impact of a massive global recession into their calculations. They knew pressures on spending would increase towards the end of the 2010s but they didn’t expect to be facing it with public debts approaching 100 percent of GDP.
The already high levels of debt give governments very little room to manoeuvre. Of course, right-wingers will say that there are massive efficiencies to be made in the public sector because there is so much waste. Left-wingers will say that there are loads of rich people hiding their money who could easily be taxed to pay for all this. Both may be right up to a point. Well, actually, not much of a point. The amounts of ‘waste’ identified by blustering politicians usually turn out to be comically small. And even if the £42bn tax gap could be collected, which a glance at the eye-watering detail in this paper shows to be damn near impossible, it still wouldn’t cover the extra costs of ageing. No matter how hard we squeeze rich tax-dodgers or lazy bureaucrats, we won’t get an extra 4% of GDP in revenue or savings.
Which means that the government’s response will have to be simultaneous tax increases and spending cuts. People will pay more and get less. The pressure to reduce the cost of public services won’t go away. Even when the economy improves, the drive for efficiency and cost cutting in the public sector will continue.
In a frank discussion about the prospects for health service funding beyond the current spending period, which ends in 2015, Mr Douglas warned NHS managers they were deceiving themselves if they believed the pressure on the service would be relaxed after the current £20bn target was met.
It’s not just 4 percent per year until 2015; NHS managers will be expected to cut costs at a similar rate for many years to come.
The same is true in other parts of the public sector. If people think 2016 is going to be the year we all say “phew” and get the chance to consolidate, they might be in for a shock. You’ve heard of permanent revolution; well this will be permanent cost-cutting. PwC has calculated that, by 2020, a further £20bn in cuts or tax increases equivalent to a 4 percent rise in VAT will be needed. The job of public sector managers will be to continually reduce the cost of their services by large amounts every year. Which, as I’ve said before, will be extremely difficult.
If some in the public sector haven’t quite grasped the implications of this, neither has the wider public. A lot of people assume that more efficient means better but, of course, it doesn’t. You can make things more efficient by delivering less, provided the drop in delivery is less than the drop in your costs. So, although the state of the future may be more efficient, it will almost certainly do less.
The economy will probably pick up over the next few years, though the size and strength of the recovery is still very uncertain. In the past, post recession recovery has taken the pressure off public spending. This time it won’t. The combined pressures of demographics and accumulated debt are too great. Even as the economy is growing, the state will still be retrenching. Fifteen years from now it will look very different.
Update: The NHS regulator has increased the annual savings target for hospitals by 50 percent! And so it begins….