The end of the state as we knew it

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.

It is not really surprising, then, that Richard Douglas, the Department of Health’s strategy director, told NHS managers that the Nicholson Challenge will continue well beyond this parliament:

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….


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9 Responses to The end of the state as we knew it

  1. Pingback: The end of the state as we knew it - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. guthrie says:

    It does look like a bad situation, but I am a little concerned with what I see that would surely make it worse. If the richest 0.5% or so are increasingly hogging the money going around as they have been in the USA and elsewhere, and especially hogging any productivity gains, then how are us normal folk supposed to save enough for our pension and spend enough to keep the economy afloat?
    And if public services are being forced into impossibly massive savings, won’t that lead to the pay of most workers being reduced as the easiest thing to attack, leading to them having less money to spend and save?
    See also the privatisation of police services, current and impending, whereby salaries offered to those doing the work are often lower than those currently paid, but the managers will do alright.

    Also why are no politicians being anywhere near honest about this sort of thing? I can imagine they don’t like bearing bad news, and most of them don’t have the time or the knowledge to understand it, but still.

  3. B.O. Locks says:

    So why do we allow mass youth unemployment? It is no wonder the general public do not believe the scare stories about an ageing population when the government and employers allow such a huge waste in human capital by locking out so many fit and productive people out of economic participation (ie employment). we need to return to traditional values – it is labour that creates wealth, not spiv bankers and other City workers.

  4. B.O. Locks says:

    Isn’t the fundamental problem the reckless and complacent management of the UK economy over these last 30 years? Relying on the City of London to produce wealth. which Brown and his Tory predecessors have done since the early 1980s, was always going to end in tears. The City is comprised largely of spivs looking to make a quick buck out of trading promissory notes of one form or another. Although some of the City’s activities have a legitimate and useful function, much of what it does is socially useless and, as the recent meltdown has shown, dishonest and fraudulent.

    Wealth is created from people doing and making things that people need and want. The City does very little of this. There are now about 5 million or more economically inactive people in the UK who are fit and potentially productive. This is a great source of wealth creation that could produce the wealth and labour to finance the predicted time bomb which ageing is said to represent. So why not get them back to work?

    It will always be difficult for governments to persuade the population of the coming age time bomb while the economy continues to be run at current levels of very high unemployment. People will just think, consciously or subconsciously, that if the State can afford to forego massive sums of income tax and National Insurance receipts by running the economy at high levels of unemployment while it pays welfare payments to the jobless then all this talk of pensions and elderly care unaffordability is hype. In short the announcers of the forthcoming time bomb will not be believed and the problem will remain unaddressed until it is too late.

    It is time to put away “free” market economics if we are to avoid the distopian future predicted by the blogger and to return to good old fashioned economic management by the government. Full employment should be a policy objective and private interests should, if the common good demands, give way. This model served us well after WW2 and would do so now if we are serious about recovery.

  5. Dipper says:

    Excellent post

    In one way, the problem and the solution are straightforward. 50 years ago people were retired for about 10% of their adult life. Now its about 30%ish. That simply isn’t affordable. People need to work longer. Their work will generate the revenue to create jobs for others.

    Sorted. Someone else can do the presentation bit.

  6. B.O. Locks says:

    @Dipper Yet it’s affordable to have 5m+ economically inactive but fit and potentially productive people? It doesn’t add up.

    • Dipper says:

      sorry for late reply … I don’t see how the retirement age and 5m+ inactive people are connected? I don’t accept the notion that there are a fixed number of jobs, so if an old person gets one a young person loses one.

      • B.O. Locks says:

        I am not trying to make a connection between the retirement age and 5m+ inactive people. My point concerns the financing of an ageing population. The issue is how will the needs of an ever growing ageing population be funded?

        Raising the retirement age is only a partial solution. As people get older they are more likely to suffer long term illness and physical fraility. This places additional demands on the health and social services which are already under pressure.

        Increasing the retirement age may keep some older workers fit for longer but eventually nature will catch up with them and they too will experience decline in health, no matter what the retirement age. So the issue is one of resources. How do we look after people who are no longer able to work?

        At the moment we have 5m + fit and productive people who are not contributing to the wealth creation process. Indeed they are a drag on the economy (no disrespect intended to them). Getting them back into work will generate additional income tax and National Insurance receipts from which the needs of an ageing population can be funded. Moreover, the benefits bill also be reduced providing an extra boost to the increased and social spending required to look after an ageing population. Also, the increased demand for labour required to look after the elderly can be met by activating the economically inactive.

        In short, running the economy at such a high level of unemployment is indicative of a rich and wasteful society, not a society struggling to meet the health and social care needs of its vulnerable members.. The 5m + economically inactive are a huge resource that Society has chosen to keep idle.

        So no, I do not believe there is a fixed number of jobs. That is a pessimistic view. Work creates wealth and so the more work that is done the more wealth there will be for us all.

  7. Pingback: How #Cameron REALLY blew it (and what next) »

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