Yahoo Finance UK facing £76bn a year public spending crisis
Britain's ageing population and more expensive healthcare are set to increase public spending by £76bn (£56bn) a year by the end of the decade, a new report by Resolution Foundation says.
The research in collaboration with LSE and funded by the Nuffield Foundation, says a new approach is needed to manage extra costs as previous approaches of shrinking defence spending and raising National Insurance (NI) are likely to be exhausted.
Its Under Pressure report looks at the fiscal pressures that governments will face during the 2020s, and how the UK has addressed such pressures in the past via changes to the size and shape of the state.
It notes that demographic change – from both an ageing society and the retirement of the baby boomer generation – will drive much of the £24bn a year increase in spending on the state pension between now and 2030.
"If people are to have long-term security when it comes to their healthcare and pensions, then we need a holistic approach to fiscal policy that recognises the interdependencies of different areas of public spending and their consequences," said Alex Beer, welfare programme head at the Nuffield Foundation.
Read more: How to cope with soaring energy prices and household costs
These factors, combined with rising healthcare costs, including from new treatments and higher rates of illness, demographic change is also set to increase healthcare spending by around £52bn a year by the end of the decade.
Higher spending on pensions and health could push the size of the UK state to 44% of GDP by 2030, approaching the size of Germany’s pre-COVID state at 45% of GDP, the foundation warns.
The UK "partly navigated" these pressures in the past by reducing other areas of public expenditure.
According to the report, defence spending shrunk from 8% to 2% over this period, while major cuts to government investment have been common. But the size of the state also expanded during the same time, from 38% of GDP post-war to around 42% currently.
A larger state in recent decades has required taxes to rise too – from 28% of GDP in 1993 to 36% by 2026.
Read more: COVID puts more than one million workers on universal credit
Meanwhile, NI rises took centre stage, accounting for the entirety of rising taxes on income this century, continuing the post-war pattern that has seen NI more than double from 3% to 7% of GDP.
Britain's transition to net zero is also likely to add more spending pressure during the 2020s, where an additional £14bn a year public investment may be required by 2030.
The fiscal impact of the net zero transition will also be seen in lost tax revenues, the report says.
Resolution Foundation found that if battery electric vehicles (BEC) are adopted as quickly in the UK as it was in Norway since 2018, tax revenues from fuel duty from cars alone will fall by £8bn by the end of the decade.
This is nearly twice as fast as figures implied by the government’s targets for electric vehicle adoption by 2030.
However, public spending pressures are not new to Britain, the authors say.
They note that over the past 70 years, combined spending on social security, health, and education have more than doubled, rising from 11% of GDP in the mid-1950s to reach a forecasted 23% in 2024-25.
Dan Tomlinson, senior economist at the Resolution Foundation, said: "Over the past seven decades we’ve expanded the NHS, the state pension and education spending, and managed those costs by shrinking the army and growing the size of the state on the back of higher National Insurance contributions.
"But we’re unlikely to be able to simply repeat that approach in future. We’ll need to tax income more efficiently and fairly, and find new sources of tax revenue such as from better taxing wealth.
"The recent row over the £13bn Health and Social Care Levy – and the unsatisfactory answer of raising National Insurance contributions yet again – is small fry compared to some of the tax raising decisions that may be required later in the 2020s. When it comes to tax, more of the same is not the answer.”
The report warns against simply repeating strategies to manage the £76bn fiscal headwind coming in the 2020s.
It says it is "unwise" to cut investment spending at a time when the net zero transition must be accelerated or during a politically toxic to end the NHS’ free at the point of use principle, adding its "undesirable" to increase NI further.
Avoiding a period of weak growth and relative economic decline is crucial, with slow economic growth post-financial crisis having effectively reduced the UK’s current spending envelope by £200bn a year relative to its pre-crisis growth path, the foundation notes.
Watch: What is inflation and why is it important?
