Welfare state needs reform to avoid a long-term fiscal crisis

 
Allister Heath

THERE is no better way to get depressed than to study the Office for Budget Responsibility’s long-term forecasts for the British economy. I’m sorry to have to write about this on such a beautiful summer’s day, but it’s a disturbing and crucially important story.

The biggest danger is that our ageing population will push up spending and the national debt – probably by a great deal or possibly (and in my view most likely) by a cripplingly large amount. Of course, if the economy were to suddenly do much better than anybody expects – or the labour force were to rise substantially as a result of a liberal immigration policy – we could still avoid a fiscal crisis.

But my own hunch is that the only way we can realistically cope with this is to drastically reform the public sector and move towards a European, Australian or Singaporean retirement and health system, where people have far greater responsibility for their own lives and there is a mixed economy in healthcare, rather than one dominated by public financing.

The central forecast for the UK’s primary budget balance (excluding spending on interest) is projected by the OBR to move from a surplus of 0.9 per cent of GDP in 2017-18 to 2.1 per cent of GDP in 2020-21 and then to a deficit of 1.8 per cent of GDP in 2062-63 – an overall deterioration of 2.7 per cent of GDP, and a structural deterioration of 4.2 per cent of GDP, £65bn in today’s terms. The net debt would rise from 76 per cent of GDP in 2012-13 to 99 per cent by 2062-63.

So much for the central assumption: really, really bad but arguably not totally nightmarish.

The problem is if some of the worse-case scenarios are considered: for example, that the population ages far more than expected, that the government enforces a zero net migration rule or that productivity turns out to be much lower than it has been in the past. The result would be catastrophic: spending as a share of GDP would rise by between 2.5 per cent and 7.6 per cent of GDP more than expected under the central scenario, crippling the public finances and forcing either massive spending cuts or huge tax hikes. The other big variable is health spending: if productivity in the NHS goes up by just one per cent a year, the national debt would rocket to close to 211 per cent of GDP by 2062-63. Again, this would be disastrous.

The report also reminds us of the extent of the collapse in North Sea output in recent years, an important cause of our decline which is unrelated to the damage caused by the bubble and bust. Total oil and gas production has fallen every year since 1999, on average by 7.8 per cent per annum, with falls of 19 per cent in 2011 and 14 per cent in 2012.

The OBR thinks there will now be a pause over the next five years – but the long-term future is grim. Between today and 2040-41, oil and gas output is expected to fall on average by five per cent a year. Revenues were worth roughly 0.85 per cent of GDP in the late 2000s and were still about 0.5 per cent last year.

But they will collapse to around 0.1 per cent of GDP by the early 2020s and to an insignificant 0.03 per cent of GDP by 2040-41. Shale gas could come to our rescue when it comes to energy output – but even it will never be enough to restore the finances of an ageing population.

WARHOL’S WISDOM
EVERY so often, one comes up with a quote from an unexpected source that is worth sharing. Here’s one from Andy Warhol, spotted by author Avril Millar. Writing in The Philosophy of Andy Warhol, the great artist was spot on. “Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art.”

Shame so few people see it that way in our contemporary culture.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath