Defusing the debt timebomb: challenges and solutions

Spending restraint, pro-growth reforms and fundamental changes to pensions and healthcare provision are urgently needed

Summary:

  • The government’s finances are currently on an unsustainable trajectory.
  • Whilst current levels of government debt are below the levels seen in previous periods in history, accumulating such large levels of debt during a long period of peacetime is more or less unknown.
  • Government debt figures do not include commitments to future spending either: governments do not account in the same prudent way that companies are required to account. An ageing population means that on unchanged policies the cost of providing age-related spending such as healthcare, pensions and social care will rise substantially over the next five decades, sending overall debt on an upward trajectory.
  • According to the government’s own Office for Budget Responsibility (OBR) a permanent fiscal adjustment (tax increases and/or spending cuts) of 1.3 per cent of national income will be necessary from 2018/19 in order to ensure that the debt-to-GDP ratio falls to 20 per cent by 2063/64.
  • However, the OBR figures make heroic assumptions about healthcare productivity and also assume that there will be a fiscal adjustment of 5.2 per cent of national income before 2018/19. In other words, spending needs to be cut by around 6.5 per cent of national income from now and for the foreseeable future to hit a government debt target of 20 per cent of national income by 2063/64. Such a measure will not create room to reverse recent tax increases.
  • If more realistic assumptions about healthcare productivity, immigration and spending priorities are made, spending would need to be cut by 9.6 per cent of national income now and for the foreseeable future to hit a debt target of 20 per cent of national income in 50 years’ time. This is equivalent to about one quarter of all government spending or one half of all social protection spending. Other approaches to the analysis of the public finances reach similar conclusions.
  • During its term of office, the government has taken action that has affected the long-term fiscal position detrimentally. Abolishing contracting-out of the state pension system, the implementation of the ‘triple lock’ on pension increases and ring-fencing health spending have been especially unhelpful.
  • The government’s long-term fiscal position would be improved by following a combination of the following policies:

- Restricting state benefits in various ways, for example only linking the state pension to price increases, raising         significantly the state pension age and introducing user-charges in healthcare.

- Various forms of deregulation aimed at raising productivity and labour market participation.

- Substantial pre-funding of pensions and healthcare.

The publication featured in The Daily Mail’s This is Money and twice in The Telegraph, including a piece by Allister Heath.

Read the press release here. 

2014, Briefing paper 14:06.

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