Reform research shows that the Government's good work on deficit reduction will be undone by the effects of the demographic timebomb

Andrew Haldenby is director of the independent think tank Reform

Reform today publishes new research on the UK’s bleak public finance position over the long term.  The lead author, Patrick Nolan, describes the research in today’s Telegraph and the report is available here.  Suffice to say that the big increase in older population – the “demographic timebomb” – explodes not in the distant future but in this very Parliament.  As a result, the Government’s policies to increase the state pension in line with earnings, and fund the NHS solely from tax, will undo all of the good work on deficit reduction on which it is currently engaged.  The deficit should indeed reduce in this Parliament but it will start to increase again in the next, and keep increasing.  It’s a picture like the US currently faces – a debt spiral which can only be escaped through radical action.

The following details of the report might be of particular interest to ConservativeHome readers.  First, the ageing population means that the tax burden (i.e. tax revenue as a proportion of GDP) will rise steadily over the next thirty years.  Governments would need radical cuts in spending just to hold taxes level.  Second, the rising tax burden will depress economic activity.  A dynamic analysis would show the deficit worsening earlier and faster.

I hope there is a great deal in this research to interest the Prime Minister, the Chancellor and the Secretaries of State for Work and Pensions and for Health, all of whom are directly involved.  But perhaps there is most relevance to Oliver Letwin and Danny Alexander, since they are tasked with the negotiations for Coalition 2.0, i.e. the new Coalition agreement for the second half of this Parliament.  The Coalition has rightly argued that deficit reduction is its most important economic policy (and indeed Liam Fox, speaking for Reform this week, argued that the basic foundations for a successful defence are sustainable public finances).  In these terms, the basic economic policy for the rest of this Parliament has to be securing deficit reduction in the long term.  At the minimum, this includes:

• Reversing the decision to uprate the basic state pension with earnings rather than prices.

• Revising the Government’s commitment to universal benefits such as the Winter Fuel Allowance.

• Seeking new ways for individuals to contribute to the costs of their healthcare from their own resources rather than from taxation.

• Ending any interest in speculative tax reductions, such as tax relief for married families.

Other Parliamentarians may also want to consider these findings, notably the members of the Treasury Select Committee and the Public Accounts Committee.  Given that the Treasury does produce long term fiscal estimates (with another set due soon), the Treasury Select Committee would be within its rights to hold an enquiry on the subject.