LONDON LETTER:Austerity is not a phase, it is the new reality, with health and pension costs rising and revenues stagnant, says Office of Budget Responsibility
BRITAIN’S HEALTH Secretary Andrew Lansley was accused of ducking the ball recently when he produced plans for taking care of the elderly that omitted dealing with the bill to be faced by each person.
Last year, an expert group recommended that no one should have to pay more than between £35,000 and £50,000 (€44,800 to €64,000) to cover the care they might need in days of infirmity.
Lansley did not commit to that figure, and was criticised for not doing so by those who said that he had frightened the old.
Indeed, the health secretary pushed the issue into the long grass.
While blessed with the national health service, as they are, the British do have to pay for nursing home care if they have assets of more than £23,000, including their home.
Forty thousand people a year have to sell up to meet care bills, though Lansley now proposes what has been cruelly dubbed as a “pay-as-you-die” scheme, where they can borrow to meet the bills. The estate would meet the bill after death.
The point of Lansley’s plan is hard to grasp, since the home gets sold anyway, while the pensioner – who is not living in it – has to pay interest on the loan.
Facing attack from the Commons’ health committee, Lansley complained: “People always want more. They always want everything to be done now. We are making all the progress we possibly can.”
The men and women in the Office of Budget Responsibility would see benefits in Lansley’s caution, given their prognostications this week on the country’s future wealth.
“Policymakers and would-be policymakers should certainly think carefully about the long-term consequences of any policies they introduce or propose in the short term,” they warned.
The logic is inexorable, if unwelcome, both to the public and to the politicians who would prefer to give the public what they want so they may survive in office.
Spending on the health service and the state pension will rise by half in real terms over the next 50 years, while the cost of caring for the elderly alone will double.
Ministers, says the Office of Budget Responsibility, would end up having to spend more on both, while the same demographic trends would leave government revenues roughly stable.
Health costs, though, are caused by ill-health, not necessarily age. Life expectancy at 65 is increasing by one year every seven, according to the Office of National Statistics.
However, healthy life expectancy between 1981 and 2006 has increased by seven months for every year longer lived by the average Briton.
“Given the increase in life expectancy, this implicitly assumes some increase in the number of years spent in ill-health,” said the Office of Budget Responsibility.
“In the absence of offsetting tax increases or spending cuts, this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory,” it went on.
The difficulties arise even though the cost of meeting public service pensions will fall from 2.2 per cent of GDP in 2016-2017 to 1.3 per cent in 2061-2062.
The fall is explained both by public service reforms announced last November and the current cuts in the numbers of those employed in the public service – though that assumes no reversal of policy.
The value today of outstanding public sector pension liabilities stands at £960 billion – or 63.8 per cent of gross domestic product at the end of March 2012.
This figure has fallen by £175 billion in just a year, largely explained by the decision to link future pension rises to the consumer price index, rather than the higher retail price index.
Excluding pension liabilities and bills to come from privately-financed hospitals and other such publicly-used projects, the UK’s public sector national debt stands at £1,203 billion – or £38,960 per household.
Meanwhile, on the income side, the Office of Budget Responsibility also predicts difficulties. North Sea revenues will continue to fall; tobacco taxes will yield less as people give up; while corporation taxes and VAT will come under pressure in a globalised world.
“So governments would be likely to need some replacement sources of revenue just to keep the tax burden constant, let alone to meet the costs of an ageing population,” the office goes on.
Nearly £17 billion in tax cuts or spending rises will be necessary come 2017-2018 if the UK is to have any chance of getting back to the level it was at before the economic crisis broke in 2007.
But the office’s forecast assumes considerable increases in NHS efficiency. If that does not happen, then the gap to be filled jumps to £68 billion.
The measures needed to deal with that issue, let alone the longer-term problems, are eye-watering: VAT would need to jump to 35 per cent, for example.
Basic income tax, if that was chosen to pay the bills, would have to rise from 20 per cent to 35 per cent – figures last seen during the high-inflation days of Labour during the 1970s.
“There are big uncertainties around these sorts of numbers,” admits the office’s head, Robert Chote, “but it does suggest that once the current crisis-related repair job has been completed, there are still challenges to confront.”
