Report: UK's Debt 'Time Bomb' Set to Go Off

The Institute of Economic Affairs (IEA) has published a report showing that unless government takes control of spending and promises to pay for future pensions and healthcare, there would be the need for “crippling tax hikes for our children and grandchildren”.

The report, by Prof Philip Booth and Ryan Bourne, found that the scale of our current debt would necessitate a reduction in government spending equivalent to £168bn each year in order to reduce the debt-to-GDP ratio to 20 percent to 2063. This is comparable to halving health, welfare and pensions spending, or cutting overall spending by a quarter.

The report, defusing the debt time bomb, reveals that in the face of an ageing population, the long term fiscal solution – in particular pensions and healthcare – is unsustainable unless significant spending restrains or reform of social security entitlements are undertaken.

According to the government’s own figures, there is a need to save an amount equivalent to scrapping all NHS spending immediately, the IEA says. The savings needed straight away equal about 6.5 percent of GDP – around £112 billion. This is roughly equivalent to scrapping all current transfers to pensioners, including the state pension, or ending all NHS spending. 

But, say the authors, even those figures may not be enough since they say that the government figures are ‘overly optimistic’.

‘The OBR figures make a controversial assumption that healthcare productivity will grow at the same rate as the rest of the economy. In fact, its average increase between 1979-2010 was just 1 percent a year. Assuming this trend continues, the scale of our debt problem becomes much more stark: spending would have to be cut by the equivalent of cutting all spending to pensioners, abolishing tax credits and reneging on public sector pensions in payment.’ it says.

In addition to overly optimistic forecasting, the IEA say that some of the current government’s policies have exacerbated the UK debt problem.

‘The triple-lock on pensions, the ring-fencing of healthcare spending, the Dilnot reforms to social care and the abolition of contracting-out of the state pension have all significantly worsened the long-term UK debt challenge’ it says. 

Commenting on the report, Prof Philip Booth, Editorial Director at the Institute of Economic Affairs, said: “Politicians must wake up to the size of the debt time bomb in the UK. Older generations have voted themselves benefits that will indebt future generations, meaning crippling tax hikes for our children and grandchildren.

“Very significant spending restraint and reform of entitlements will be required in the next parliament and beyond to get our debt levels back under control.”

And co-author Ryan Bourne told Breitbart London: “Our long-term fiscal path is unsustainable. On unchanged policies, the public debt will begin rising uncontrollably given the cost of state programmes for health and pensions as our population ages.”

The solution? Government spending must be cut by 25 percent they say – and that would just hit the debt targets and not touch tax cuts which many argue are needed for expansionary economic policy. 

The report suggests areas where reforms could be made to meet these targets, focusing on healthcare and pensions. They advocate changing the eligibility for pensions and healthcare by raising the state pension age further and linking increases to increases in the cost of living. They say it may also be ‘inevitable’ that pricing or charging for some aspects of healthcare be introduced.

In addition, replacing the state pension with a compulsory, private defined-contribution pension arrangements – which have succeeded in Australia – should be considered, they argue, saying that a compulsory healthcare insurance system would also benefit future generations.

But the problem with this lies in a cultural ideology, as Bourne explains:

“If we are to avoid crippling taxes on a shrinking working population to pay for this, it’s clear that significant spending restraint and reform of health and pensions will be necessary.

“This requires a level-headed debate, in particular about how we deliver healthcare and whether a free at the point of need NHS is viable in the long-run. Unfortunately, this debate is so often closed down by institution worshipping ideologues who do not want to discuss fiscal reality”.