Ready for Ageing? - Select Committee on Public Service and Demographic Change Contents

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 StatisticsBack

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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