Robert Chote, Chairman of the Office for Budget Responsibility (OBR), shares the results of the OBR’s 2012 Fiscal Sustainability report, with a specific focus on health care spending.
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