Spending on education, pensions and the NHS is sustainableby Peter Taylor-Gooby / March 29, 2013 / Leave a comment
The British welfare state has a grand tradition. Many argue it has no future. It includes highly popular mass services, such as the NHS, the education system and state pensions, and also welfare for the poor and low-waged, including unemployment and housing benefits, tax credits and family support. Services in the first area are highly popular, but cost a lot to run (currently nearly a quarter of GDP, some 55 per cent of all state spending). Those in the second are cheaper (6 per cent of GDP, nearly a sixth of state spending) and at the heart of debates about work incentives and spending cuts. Healthcare, education and pensions (the lion’s share of the welfare state) are seen as unsustainable because costs will escalate as the population ages and staff costs rise. This assumption is misleading.
The claim that healthcare, education and pensions are unsustainable is often based on long-term spending projections, such as those of the Office of Budgetary Responsibility, below:
Spending on the main state services, 2011-2062 (% GDP)
Spending initially falls, as austerity and capital spending cuts bite home. Healthcare and pension expenditure then rise as the number of older people increases, while education stays roughly constant. Independent projections by the European Commission show a similar pattern. The projections assume a return to sustained economic growth in the near future. If growth does not return, all bets are off—and we will live in a very different world.
The projections cover a very long time period, during most of which the economy will also grow. If GDP grows at 2.5 per cent annually (the average over the past half century, including boom years and recessions) it will be 2.35 times larger in real terms by 2062. Spending about 2 per cent extra from this larger GDP on pensions and another 2 per cent on sustaining the NHS does not seem too heavy a burden when spread over 40 years during which resources expand. Living standards would have to grow at a slightly lower rate than the economy as a whole to make room for the extra spending on public services.
Spending across the three areas grew by roughly 4 per cent of GDP under…