THE GOVERNMENT needs to slash spending by a quarter if it is to meet its debt target due to the UK’s ageing population, a new report argues.
Public sector debt is now over 75 per cent but this fails to take into account the effects of the UK’s ageing population, according to the report released today by Westminster think thank the Institute of Economic Affairs.
The report finds that spending would have to fall by £168bn each year to reduce the debt-to-GDP ratio to 20 per cent by 2063 – the current target.
Achieving the target is comparable to halving health, welfare and pensions spending, or cutting overall spending by one quarter.
Treasury watchdog the Office for Budget Responsibility has estimated that to have a national debt of 20 per cent of GDP by 2063 we need a sustained fall in spending of 6.5 per cent of GDP. Although already a substantial sum, these figures are optimistic, the report says.
OBR figures make a controversial assumption that healthcare productivity will grow at the same rate as the rest of the economy. In fact, its average increase between 1979 and 2010 was just one per cent a year. Assuming this trend continues, the scale of our debt problem becomes much more stark – spending would have to be cut by the equivalent of cutting all spending to pensioners, abolishing tax credits and reneging on public sector pensions in payment.
The report recommends replacing the state pension with a compulsory, private defined-contribution pension arrangement – which has succeeded in Australia. “Politicians must wake up to the size of the debt time bomb in the UK,” said Professor Philip Booth, one of the report’s authors.
“Older generations have voted themselves benefits that will indebt future generations, meaning crippling tax hikes for our children and grandchildren. Very significant spending restraint and reform of entitlements will be required in the next parliament and beyond to get our debt levels back under control.”