Bill Jamieson: Ageing population a problem bigger than Brexit

The over-65s and over-85s group has expanded significantly and will continue to increase. Picture: Getty Images/iStockphoto
The over-65s and over-85s group has expanded significantly and will continue to increase. Picture: Getty Images/iStockphoto
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Economic and demographic trends including an ageing population are a much greater concern, says Bill Jamieson

Seldom has it been more difficult to look beyond our immediate situation to the bigger problems beyond. Prime Minister Theresa May is trapped, unable to move forward without support from opposition parties.

This week she appealed to other political parties to put forward their proposals for debate and discussion. Little support seems to be forthcoming, judging by the statements in the Commons on Tuesday. The Labour opposition is in no mood to do her any favours, and indeed has every incentive to keep this enfeebled administration on a cliff edge.

Meanwhile, Brexit negotiations have run into an implacable wall of opposition and negativity in Brussels. And the week has brought a fresh wave of doubts within her own party as to whether she can – or should – survive as PM.

The Prime Minister’s position looks unsustainable. Potential leadership contenders are being freely discussed. We look on course for a political crisis in the autumn with the party conference season, when politicians and markets return from holidays and assess what the future holds. Little of it looks good.

It is being compared to a Dunkirk moment for the UK: a government with no authority and facing a humiliating retreat from Brexit, the biggest single political humbling for a generation. The negotiating response in Brussels so far on fundamental issues such as migrant controls, tariff-free trade deals and UK citizens resident in the EU varies between ‘no’, ‘not a hope’ to ‘nopety nope’.

An air of ‘Brexit fatigue’ is already setting in, sapping the will of many in the government – and the country – to proceed with the Brexit referendum mandate. Better surely, to end the uncertainty, cut our losses, and settle for some transitional arrangement doubtless taking two years of haggling and fudge to mask the abandonment of the Brexit vote.

At home, there is a tightening squeeze on household incomes, demands to end the cap on public sector pay and pressure to relax constraints on government spending. Little wonder, given this and all Brexit uncertainties, that business investment is slowing and consumer confidence has turned down.

The government is thus approaching a moment of maximum danger: “febrile” barely begins to describe the mood. Something has to give – and soon.

Yet if this political jam does ’give’ in the autumn, from what have we escaped, and what can we expect by way of release? A change in prime minister – take your pick from David Davis, Boris Johnson, Philip Hammond, Amber Rudd, Priti Patel or any number of dark horses – might change the political mood.

And a most likely resulting change would be a relaxation of ‘austerity’ and a rallying of political support for the government through fiscal easing: the time-worn tradition of governments when in trouble – Harold Wilson in 1966-67; Heath and Tony Barber in 1971-72; Callaghan and Healey in 1976; Thatcher and Lawson in 1989; Gordon Brown in 2007.

But each desperate dash for growth and spending splurge was followed by a slam on the brakes, economic downturn – and political defeat. Government-induced booms and busts are constantly repeated. And a spending resurgence at this time is unlikely to be any different

The same applies to the outcome of another general election in which Labour may emerge as the party most capable of forming an administration, helped by some coalition arrangement with the SNP and Liberal Democrats. This would appear to offer a dramatic change in political direction and a programme of far reaching change, with substantial increases in public spending, borrowing and tax.

Yet how far, and how fast, could any change proceed without running into the problem bigger than Brexit that lies ahead?

What could possibly be a bigger problem for the UK? It is to be found in a barely covered report to the UK parliament earlier this year. Forebodingly entitled The Office for Budget Responsibility Sixth Fiscal Sustainability Report, it carried an analysis of the sustainability of the UK’s long-term public finances, providing an insight into how long-term economic and demographic trends, including our ageing population, are likely to impact the public finances over the next half century.

Need we worry that much about how the public finances are likely to be affected by long-term economic and demographic trends up to 2066?

The report highlights just how dramatically our ageing population is set to re-write the UK’s political and financial agenda. Public spending on health is set to rise substantially, together with spending on long term care and state pensions.

With spending rising rapidly as a share of GDP over the next half century whilst receipts are effectively flat, there would be a “steady and unsustainable” (in the OBR’s judgement) deterioration in the public finances without a policy response (in other words, fiscal tightening).

The OBR estimates that public sector net borrowing (PSNB) would rise from 0.7 per cent of GDP in the 2021 financial year to 16.6 per cent by 2066. And public sector net debt (PSND) would rocket from 82 per cent of GDP (in 2021) to 234 per cent.

I’ll repeat that number in case readers might think a decimal point was missing: 234 per cent.

Much of this is driven by demographics, specifically the way in which the population structure is projected to change over the next half century - and has, indeed, changed over the past 55 years. Back in 1961 the under-15s comprised nearly a quarter of the population. By 2016 this had dropped to under 20 per cent. And it is expected to fall further by 2066.

In contrast, the over 65s group - and especially the over 85s - has expanded significantly. The over 65s comprised 12.5 per cent of the population in 1961, rising to 18 per cent last year and set to top 26 per cent by 2066. The core working age group (16-64-year-olds) comprised 64 per cent of the population in 1961. This is forecast to fall to 56.4 per cent by 2066.

Barring some momentous behavioural change or natural disaster, the iron laws of demographics will have a far greater influence on government than today’s politicians admit. The idea that there can be a ‘free run’ by ditching austerity is a myth.

Says economist Ruth Lea: “The OBR’s Report provides a timely reminder that the public finances are unsustainable without significant fiscal tightening. So rather than opening the spending taps, and ending ‘austerity’, it is clear that austerity will have to be factored in for the foreseeable future if the public finances are to be controlled.”

We hear often that we are “the sixth largest economy in the world” and able to afford almost anything.

But we are already one of the most indebted. The fact is that we are constrained by unavoidable obligations that lie ahead.

The bigger problem than Brexit is finding the political leadership – and the political will – to begin to prepare for them. For now there is worryingly little evidence of such leadership – or such political will – anywhere on the horizon.