UK faces crippling tax rises to pay for ageing population

New IEA research reveals the staggering level of the government’s hidden indebtedness

To fund future pension and social care obligations, the government will need to cut spending by more than a quarter, cut health and social protection spending by half, or impose significant tax hikes. Stark new research released today by the Institute of Economic Affairs reveals the staggering level of the government’s hidden indebtedness in the face of an ageing population.

In The Government Debt Iceberg, Jagadeesh Gokhale reveals the extent to which western governments are keeping taxpayers in the dark about true levels of debt by hiding the magnitude of future spending commitments that cannot be met by future tax receipts.

Official debt figures from both EU and US governments do not take into account future pension and healthcare obligations. As populations age, tax bases will grow more slowly while government spending rises faster. This is a direct result of the promises made to today’s older and middle-aged generations.

The situation without reform

  • For EU countries to finance all future spending commitments, consumption taxes (VAT, fuel duty etc) will have to more than double, or health and social spending will have to be halved.
  • In the UK, total spending would have to be cut by more than a quarter, or health and social care protection expenditure by 50% to avoid tax increases if current obligations are to be met from tax revenue in the long run.
  • If the US is to close its fiscal imbalance federal taxes will have to double into the indefinite future, or federal spending will have to be cut by over a third.

The true extent of indebtedness

  • Governments should measure indebtedness in terms of the extent to which all future spending plans cannot be financed by current taxation. Explicit debt – inherited from the past – is already enormous, equal to 85% of national income in the EU, or 2.1% of the present value