Annex 4: Economic and fiscal impacts of
the ageing population (see paragraphs 3 and 10 of the report)
Economic impacts of the ageing
population
92. Economic output (GDP) is broadly the product
of the number of people working in an economy multiplied by their
average productivity.[72]
93. Although GDP does not give the full picture
of older people's contributions to the economy and society (as
explored in Annex 3), an increased 'dependency' ratio will reduce
GDP growth.[73] All other
things being equal, GDP (and GDP per capita) will be higher if
there are more people in work. Conversely, if the proportion of
the population not working increases, this reduces growth output.
So for economic reasons it is desirable to encourage older people
to consider working longer, albeit perhaps part-time; this will
boost per-capita GDP.[74]
While there are additional health and social benefits to working
longer (explored in Annex 5), we stress that the decision to continue
working must represent an informed, independent choice, freely
taken by individuals.
94. The result of an ageing population therefore
does not necessarily mean that the country will be poorer: average
productivity per worker will, barring economic disaster, grow
very substantially over the next few decades.[75]
But if ageing leads to a substantially higher 'dependency' ratio,
this could mean that individuals will be significantly poorer
in the future than they would have been if the 'dependency' ratio
had stayed constant.
95. Improving pension provision, public and private,
will not by itself get around this problem: current consumption
has, by and large, to be paid for out of current production.[76]
Fiscal policy and the way that we think about public and private
savings will both need to respond.
96. While older people contribute much to society
that measurements of GDP do not take into account, the Government
need to take the potential impact of ageing on GDP growth seriously.
Without Government action to mitigate the potential effects that
an increased number of economically inactive older people would
have on GDP growth, economic principles mean that the ageing of
the country's population would stand theoretically to have a substantial
negative impact on the health of our economy. This is not what
we expect to happen: we explore the action that should be taken
in Annex 5.
Fiscal impacts of the ageing
population
97. The Office for Budget Responsibility (OBR)
suggests that the direct fiscal impact of the ageing population
will be significant, but manageable.[77]
Tom Josephs, Head of Staff, OBR, told us that "In purely
fiscal terms ... the adjustment that we think you might need to
make over the course of the next 50 years is not a huge one, particularly
if you were to do it gradually over time. The adjustment that
has been made in the short term ... is much greater than the one
that we are talking about for the future."[78]
Andrew Harrop, General Secretary, Fabian Society, did not believe
that the long-term prognosis for UK public finances would be undermined
by demographic change. In his view, although "the consequences
of taking no action would not be benign ... the scale and urgency
of the change required is modest".[79]
98. However, other witnesses were more concerned.
Michael Johnson, Research Fellow, Centre for Policy Studies, has
contended that once the "deleterious impact of our ageing
population ... is factored in, national debt is expected to fall
back to 60% of GDP in the mid-2020s, and then climb inexorably
through 100% of GDP (107% of GDP in 2060-61)".[80]
Patrick Nolan and others at Reform claimed that the country is
in political denial of the problems that demographic change will
bring.[81]
99. Others thought that the risk was not so much
of an overall fiscal crisis driven by ageing, but that pressures
for increased social spending (especially on pensions, health
and social care), primarily resulting from demographic change,
would squeeze out other important priorities (for example capital
investment, which the OBR projections assume remains at a historically
very low level), or leave us vulnerable to future crises. The
Institute for Public Policy Research (IPPR) outlined how over
the last 50 years, the Government have been able to fund rises
in social spending through falls in spending on non-social areas
such as defence, nationalised industries and debt interest payments,
and by cutting capital spending. But healthcare, social security
and education took up 60% of the public budget in 2008. The IPPR
argued that "There is a risk that the impact of ageing on
the public finances is overstated while other, equally important
trends are given less attention in public policy".[82]
Similarly, the Social Market Foundation and the Royal Society
of Arts have painted a bleak picture for most other Government
Departments if health spending is protected on demographic or
political grounds.[83]
Dr Martin Weale, Professor at Queen Mary, University of London,
pointed out that policy has to plan for possible future periods
of substantial economic disruption.[84]
100. The Committee believes that the Government
need properly to consider the potential long-term fiscal implications
of the ageing population. Government and citizens have choices
about how we respond to these trends, as laid out elsewhere in
these annexes (see Annex 7). But unless preparing for the ageing
society begins in earnest, we risk a manageable policy challenge
becoming an unmanageable public service crisis.
101. The Government have a number of urgent decisions
to make. Pressure on spending resulting from the ageing population
will come primarily from increases in spending on health, social
care and pensions (see Annexes 8 to 14).[85]
How to manage the relative impacts of each of these spending pressures
represents a choice. Improvements in technology in healthcare,
and better public sector productivity in social care, potentially
could improve the welfare of people using these services, but
it will be a challenge to reduce spending pressures through productivity
gains alone.[86] Further
fiscal pressure would also result from any increase in the 'dependency'
ratio, because a lower proportion of people in work means lower
tax revenues, and, probably, higher public expenditure.
102. This still leaves the risk of additional
pressures resulting from the 'political economy' of an ageing
population: older people are more likely to vote, and they are
growing in number.[87]
This implies a growing pressure on the Government to provide improved
state-funded services and benefits for older people. Such
provision might be financed through higher taxes on the young
and working population, through less spending on investment, or
through both approaches, thereby increasing the size of intergenerational
transfers (see Annex 7).
72 OECD, Labour Productivity Growth, Factbook 2011-2012:
Economic, Environmental and Social Statistics. Back
73
The 'dependency' ratio is the number of people over the state
pension age being supported by those of working age. We note that,
as discussed in Annex 3, many people over the state pension age
would not consider themselves 'dependent'. Back
74
Q 597 (Paul Johnson, Director, Institute for Fiscal Studies (IFS)). Back
75
OECD, Medium and long-term scenarios for global growth and
imbalances, Economic Outlook, Volume 2012/1. Back
76
This is true as a matter of definition in the case of the world
economy; in the case of the UK, while people could in principle
save more now, invest the savings abroad, and consume more later
with the proceeds, this is unlikely to be a viable economic strategy.
The UK has not run a current account surplus since 1981. Back
77
Office for Budget Responsibility (OBR), Fiscal Sustainability
Report, July 2012; IPPR. Back
78
Q 150 Back
79
Fabian Society. Back
80
Michael Johnson, Put the saver first: catalysing a savings
culture, Centre for Policy Studies, June 2012, p.3. Back
81
Patrick Nolan et al., Entitlement reform, Reform, November
2012. Back
82
IPPR. Back
83
Ian Mulheirn et al., Fiscal fallout: the challenge ahead for
public spending and public services, Social Market Foundation
and the Royal Society of Arts, 12 November 2012. Back
84
Q 122 Back
85
Confederation of British Industry (CBI). Back
86
Q 668 (Rt Hon Jeremy Hunt MP, Secretary of State for Health, Department
of Health). Back
87
Patrick Nolan et al., Entitlement reform, Reform, November
2012. Back
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