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Public finances and health care


                           Robert Chote
                              Chairman

                           18 July 2012
Our approach in the report

• 50-year projections
  – Spending, revenues and financial transactions
  – Budget deficits and public sector net debt
  – Judge sustainability and possible tightening

• Four important things to remember
  –   Broad brush projections, not precise forecasts
  –   ‘Unchanged policy’ not always easy to define
  –   First 5 years consistent with March EFO forecast
  –   Focus beyond the current fiscal consolidation
Assumptions: demography
                                                       Figures denote
                                                       average annual
                                                        growth rates
                               100                                      • New ONS projections this year
                                                          2.7%
                                                                            – More inward migration
                                                                            – Life expectancy lower for elderly
                                80                        0.9%
                                                                              and higher for future newborns
Per cent of UK p op ula tion




                                                          0.2%
                                                                            – Leads to bigger population
                                60
                                                                        • Ageing population – past rises in
                                                                          life expectancy and falls in fertility
                                40                        0.1%            plus baby boom ‘bulge’

                                20                                      • Our central projection assumes:
                                                                            – 65+ proportion rises from 17%
                                                          0.2%                in 2011 to 26% in 2061
                                 0                                          – Net inward migration averages
                                           2012            2062               roughly half recent levels
                               0- 15   16- 54 55- 64     65- 84 85+
Assumptions: economy and policy
• Economy
   – Productivity grows 2.2% a year, in line with history
   – CPI inflation at 2%, consistent with Bank target
   – GDP deflator rises 2.5% a year

• Tax and welfare
   – Income tax / NICs allowances rise by earnings
   – Most working age benefits rise by earnings
   – Basic state pension subject to ‘triple guarantee’

• Public services spending rises with per capita GDP,
  adjusted for age composition of the population
Revenues and public spending by age
                                              30
£ th ousa n d s (esti m a tes for 2016- 17)




                                              25

                                              20

                                              15

                                              10

                                               5

                                               0
                                                   0   10    20     30     40      50     60       70     80     90   100
                                                                                   Ag e
                                                       Reven ue                                Ed uca tion
                                                       Hea lth                                 Lon g - ter m ca r e
                                                       Tota l p ub lic ser vices
Results: non-interest spending
                                                      Per cent of GDP
                              Estimate                         FSR Projection
                           2011-12 2016-17 2021-22 2031-32 2041-42 2051-52 2060-61 2061-62
Health                         8.1       6.8    7.1       7.7     8.3     8.7    9.0    9.1
Long-term care                 1.3       1.1    1.2       1.5     1.7     1.9    2.0    2.0
Education                      5.7       4.5    4.6       4.6     4.4     4.4    4.5    4.5
State pensions                 5.7       5.6    5.3       6.1     7.0     7.3    8.2    8.3
Pensioner benefits             1.2       1.1    1.1       1.2     1.3     1.2    1.2    1.2
Public service pensions        2.1       2.2    2.0       1.7     1.5     1.3    1.3    1.3
Tota l a g e- rel a ted
                             24.1    21.3      21.3     22.8    24.2    24.9    26.2   26.3
sp en d i n g
Other social benefits         6.3        5.1    5.3       5.2     5.1     5.2    5.2    5.2
Other spending               12.2        9.2    9.2       9.2     9.2     9.3    9.3    9.3
Pri m a ry sp en d i n g     42.6    35.6      35.8     37.2    38.5    39.4    40.7   40.8
Results: non-interest revenues


                                                Per cent of GDP
                          Estimate                        FSR Projection
                       2011-12 2016-17 2021-22 2031-32 2041-42 2051-52 2060-61 2061-62
Income tax               10.0    10.6    10.6     10.6     10.7     10.7   10.8   10.9
NICs                      6.7     6.9     6.8      6.7      6.8      6.7    6.7    6.7
Corporation tax           2.9     2.5     2.5      2.5      2.5      2.5    2.5    2.5
VAT                       6.4     6.3     6.3      6.4      6.4      6.4    6.5    6.5
Capital taxes             1.1     1.3     1.4      1.4      1.5      1.5    1.5    1.5
Other taxes              10.2     9.8     9.8      9.9     10.0     10.0   10.1   10.1
Pr im a r y r evenue     37.3    37.3    37.5     37.5     37.9     37.9   38.1   38.2
Revenue and spending projections
                  45
                                                FSR projection

                  43
Per cent of GDP




                  41

                  39

                  37

                  35
                  2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61
                          N on - in ter est sp en d in g N on - in ter est r even ue
Public sector net debt
                   250
                                                       FSR projection

                   200
Per cen t of GDP




                   150

                   100

                    50

                     0

                   - 50
                    2010- 11   2020- 21      2030- 31       2040- 41    2050- 51   2060- 61

                           Con sta n t p r im a r y b a la n ce
Public sector net debt
                   250
                                                  FSR projection

                   200
Per cen t of GDP




                   150

                   100

                    50

                     0

                   - 50
                    2010- 11 2020- 21 2030- 31 2040- 41            2050- 51   2060- 61
                           Cen tr a l
                           Con sta n t p r im a r y b a la n ce
Health care spending I
• Central assumption is for per capita health spending
  to rise with GDP, adjusted for population changes

• But – leaving demographics aside – output of health
  care will only rise in line with the output of the rest of
  the economy if productivity growth is the same (we
  assume 2.2% a year)
Health care productivity
                                            138
100= p rod ucti vi ty l evel i n 1974- 75


                                            134
                                            130
                                            126
                                            122
                                            118
                                            114
                                            110
                                                                           Avera g e g rowth : 0.8% p er yea r
                                            106
                                            102
                                             98
                                                  1979   1983 1987 1991 1995 1999 2003 2007
                                                          Cost- Weig h ted Activity In d ex (Oliver , 2005)
                                                          ON S
Health care spending II
• Productivity growth in health care c.0.8% pa since 79

• If it stays that way, health spending would need to rise
  3.6% a year in real terms for output to keep up

• Adds 7.5% of GDP to health spending by 2061-62,
  relative to central scenario

• We have seen significant rises internationally over past
  40 years, with less demographic pressure
Health spending in OECD since 1970
  United Sta tes
          Fr a nce
           Sp a in
         Austr ia
       Ger m a ny
          Ja p a n
United King d om
        N or wa y
  N ew Zea la nd
         Icela nd
        Ca na d a
       Austr a lia
         Ir ela nd
         Finla nd
       Denm a r k
        Swed en

                     0   2            4             6            8              10   12
                             Cha ng e in hea lth sp end ing (%GDP) since 1970
Public sector net debt
                   250
                                                  FSR projection

                   200
Per cen t of GDP




                   150

                   100

                    50

                     0

                   - 50
                    2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61
                           Cen tr a l
                           Con sta n t p r im a r y b a la n ce
                           An n ua l h ea lth ca r e p r od uctivity g r owth of 0.8%
Achieving sustainability
• Different definitions

• PSND of 40% of GDP in 2061-62

   – Permanent tightening of 1.1% of GDP from 2017-
     18 or 0.4% of GDP each decade in central
     scenario

   – Permanent tightening of 4.4% of GDP from 2017-
     18 or 1.4% of GDP each decade if per capita
     health spending rises 3.6% a year in real terms

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Robert Chote: Public finances and health care

  • 1. Public finances and health care Robert Chote Chairman 18 July 2012
  • 2. Our approach in the report • 50-year projections – Spending, revenues and financial transactions – Budget deficits and public sector net debt – Judge sustainability and possible tightening • Four important things to remember – Broad brush projections, not precise forecasts – ‘Unchanged policy’ not always easy to define – First 5 years consistent with March EFO forecast – Focus beyond the current fiscal consolidation
  • 3. Assumptions: demography Figures denote average annual growth rates 100 • New ONS projections this year 2.7% – More inward migration – Life expectancy lower for elderly 80 0.9% and higher for future newborns Per cent of UK p op ula tion 0.2% – Leads to bigger population 60 • Ageing population – past rises in life expectancy and falls in fertility 40 0.1% plus baby boom ‘bulge’ 20 • Our central projection assumes: – 65+ proportion rises from 17% 0.2% in 2011 to 26% in 2061 0 – Net inward migration averages 2012 2062 roughly half recent levels 0- 15 16- 54 55- 64 65- 84 85+
  • 4. Assumptions: economy and policy • Economy – Productivity grows 2.2% a year, in line with history – CPI inflation at 2%, consistent with Bank target – GDP deflator rises 2.5% a year • Tax and welfare – Income tax / NICs allowances rise by earnings – Most working age benefits rise by earnings – Basic state pension subject to ‘triple guarantee’ • Public services spending rises with per capita GDP, adjusted for age composition of the population
  • 5. Revenues and public spending by age 30 £ th ousa n d s (esti m a tes for 2016- 17) 25 20 15 10 5 0 0 10 20 30 40 50 60 70 80 90 100 Ag e Reven ue Ed uca tion Hea lth Lon g - ter m ca r e Tota l p ub lic ser vices
  • 6. Results: non-interest spending Per cent of GDP Estimate FSR Projection 2011-12 2016-17 2021-22 2031-32 2041-42 2051-52 2060-61 2061-62 Health 8.1 6.8 7.1 7.7 8.3 8.7 9.0 9.1 Long-term care 1.3 1.1 1.2 1.5 1.7 1.9 2.0 2.0 Education 5.7 4.5 4.6 4.6 4.4 4.4 4.5 4.5 State pensions 5.7 5.6 5.3 6.1 7.0 7.3 8.2 8.3 Pensioner benefits 1.2 1.1 1.1 1.2 1.3 1.2 1.2 1.2 Public service pensions 2.1 2.2 2.0 1.7 1.5 1.3 1.3 1.3 Tota l a g e- rel a ted 24.1 21.3 21.3 22.8 24.2 24.9 26.2 26.3 sp en d i n g Other social benefits 6.3 5.1 5.3 5.2 5.1 5.2 5.2 5.2 Other spending 12.2 9.2 9.2 9.2 9.2 9.3 9.3 9.3 Pri m a ry sp en d i n g 42.6 35.6 35.8 37.2 38.5 39.4 40.7 40.8
  • 7. Results: non-interest revenues Per cent of GDP Estimate FSR Projection 2011-12 2016-17 2021-22 2031-32 2041-42 2051-52 2060-61 2061-62 Income tax 10.0 10.6 10.6 10.6 10.7 10.7 10.8 10.9 NICs 6.7 6.9 6.8 6.7 6.8 6.7 6.7 6.7 Corporation tax 2.9 2.5 2.5 2.5 2.5 2.5 2.5 2.5 VAT 6.4 6.3 6.3 6.4 6.4 6.4 6.5 6.5 Capital taxes 1.1 1.3 1.4 1.4 1.5 1.5 1.5 1.5 Other taxes 10.2 9.8 9.8 9.9 10.0 10.0 10.1 10.1 Pr im a r y r evenue 37.3 37.3 37.5 37.5 37.9 37.9 38.1 38.2
  • 8. Revenue and spending projections 45 FSR projection 43 Per cent of GDP 41 39 37 35 2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61 N on - in ter est sp en d in g N on - in ter est r even ue
  • 9. Public sector net debt 250 FSR projection 200 Per cen t of GDP 150 100 50 0 - 50 2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61 Con sta n t p r im a r y b a la n ce
  • 10. Public sector net debt 250 FSR projection 200 Per cen t of GDP 150 100 50 0 - 50 2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61 Cen tr a l Con sta n t p r im a r y b a la n ce
  • 11. Health care spending I • Central assumption is for per capita health spending to rise with GDP, adjusted for population changes • But – leaving demographics aside – output of health care will only rise in line with the output of the rest of the economy if productivity growth is the same (we assume 2.2% a year)
  • 12. Health care productivity 138 100= p rod ucti vi ty l evel i n 1974- 75 134 130 126 122 118 114 110 Avera g e g rowth : 0.8% p er yea r 106 102 98 1979 1983 1987 1991 1995 1999 2003 2007 Cost- Weig h ted Activity In d ex (Oliver , 2005) ON S
  • 13. Health care spending II • Productivity growth in health care c.0.8% pa since 79 • If it stays that way, health spending would need to rise 3.6% a year in real terms for output to keep up • Adds 7.5% of GDP to health spending by 2061-62, relative to central scenario • We have seen significant rises internationally over past 40 years, with less demographic pressure
  • 14. Health spending in OECD since 1970 United Sta tes Fr a nce Sp a in Austr ia Ger m a ny Ja p a n United King d om N or wa y N ew Zea la nd Icela nd Ca na d a Austr a lia Ir ela nd Finla nd Denm a r k Swed en 0 2 4 6 8 10 12 Cha ng e in hea lth sp end ing (%GDP) since 1970
  • 15. Public sector net debt 250 FSR projection 200 Per cen t of GDP 150 100 50 0 - 50 2010- 11 2020- 21 2030- 31 2040- 41 2050- 51 2060- 61 Cen tr a l Con sta n t p r im a r y b a la n ce An n ua l h ea lth ca r e p r od uctivity g r owth of 0.8%
  • 16. Achieving sustainability • Different definitions • PSND of 40% of GDP in 2061-62 – Permanent tightening of 1.1% of GDP from 2017- 18 or 0.4% of GDP each decade in central scenario – Permanent tightening of 4.4% of GDP from 2017- 18 or 1.4% of GDP each decade if per capita health spending rises 3.6% a year in real terms