Friday, 15 July 2011

The effects of an ageing population

The Office of Budget Responsibility has published the results of analysis of the long-term effects of an ageing opulagtion: Ageing

The headline conclusion is that further public spending cuts or tax rises will be needed after 2016-17. The pressures are estimated to be so great that a tax rise of 1.5 per cent of national income would be needed in 2016 to put public sector debt on a path to return to 40 per cent of national income by 2060. Such a rise would be equivalent to increasing value added tax to 24 per cent.

Ageing has little effect on taxation but would raise public spending by 5.3 per cent of national income. These rises would start in the 2020s and are driven by a sharp increase in the costs of health care, state pensions and long-term care. However, it should be noted that Britain's likely burden from ageing was no worse than in the US and better than in many European countries.

However, the OBR does assume relatively modest rises in health spending which seems somewhat unrealistic given the pressures that arise from advances in medicine. If the rate of growth of health spending was closer to the historical average, it would take up another 5 per cent of national income by 2060.

There are real intergenerational justice issues here, but people have a strong sense of entitlement to benefits in old age. Moreover, older voters have a much higher propensity to vote that younger voters, approaching 70 per cent.

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