Ageing population adds to UK’s woes

Allister Heath
OUR panel of City and business professionals’ verdict on the Budget makes grim reading for Alistair Darling: the average grade given was 3.8 out of 10, as we report on pages 1 and 19.

Members of the City A.M./PHI panel, produced with, rubbished Darling’s growth forecasts for 2011-12 and slammed his new 50p tax rate. The general public may have liked Darling’s war on wealth – but our panellists begged to differ.

They were not the only ones to give the Budget a thumbs-down. The Institute of Fiscal Studies points out that virtually all of the growth in spending on the public services as a share of GDP under Labour will have to be unwound; spending on non-protected departments will have to be slashed by 25 per cent.

But there are also longer-term pressures on spending, including a desperate need to improve the UK’s abysmal infrastructure, and its ageing population, as Corin Taylor of the Institute of Directors points out. In 20 years’ time, according to the Treasury’s long term projections, state pension expenditure, public sector pensions and long term care spending will each be 0.5 per cent of GDP higher; and health spending will be 1.5 per cent of GDP higher. That’s a total of 3 per cent of GDP, nearly £45bn in today’s money, that will need to be found every year. If anything the figures underestimate the pressure to increase overall spending on healthcare. Meanwhile, around £500bn will be needed over the next decade to boost the UK’s energy, transport, water and technology infrastructure, the Institute argues. Put these two together – a huge deficit in the short term and significant pressure on public spending in the medium term – and the UK’s fiscal position looks even more depressing. There is only one workable answer: the private sector will have to be harnessed to operate and part-fund what we have come to think of as public services. Needless to say, there was no mention of any of this in the Budget.

There is much nonsense being spoken about the size and scale of the recession and its effect on employment. So here are the facts, many of which have been usefully collated by Michael Saunders of Citigroup.

The economy’s output was 6 per cent below its pre-recession level at the end of last year, a greater peak to trough slump than in past post-war recessions (3.2 per cent in the mid-1970s, 4.8 per cent in the 1980s, 2.4 per cent in the 1990s). Unemployment is up by 880,000, similar to the rise at the same stage of the 1990s recession (780,000 people) and less than during the 1980s recession (1.242m).

Employment is down 2.1 per cent, against 3.8 per cent and 4.6 per cent in the 1980s and 1990s recessions. An even better gauge is the total level of hours worked: this is down 4.3 per cent, against 7.2 per cent and 6.6 per cent. One reason is that public sector employment is still growing; but even the collapse in private sector jobs was relatively modest. Another is that foreign nationals are losing their jobs at a faster rate than UK citizens and may not be counted in the official stats.

But the goodish news on jobs has created another problem: while pay has been subdued, the fact that output has shrunk more than hours worked has sent labour costs soaring 4.4 per cent in the third quarter. Unless output per worker rises again, and costs are brought back under control, expect an unusually jobless