New analysis carried out by PricewaterhouseCoopers shows that the Government’s intention to achieve an 80% employment rate will only offset part of the upward pressure on public spending as the population ages.
The Government is aiming to raise the working age employment rate from around 73% (for 16-64 year-olds) at present to 80% in the long run. However, new analysis by PricewaterhouseCoopers suggests that this target, which is likely to be challenging to achieve, would only offset around half of the significant upward pressure expected on public spending over the period to 2050. Increased pressure on public spending is expected from an ageing population and technology-related rises in health costs.
John Hawksworth, Head of Macroeconomics at PricewaterhouseCoopers and author of the analysis, said:
“Any long-term projections are necessarily highly uncertain, but the most likely scenario is that future governments will be faced with difficult choices between continuing with the recent direction of policy in areas like health, education and measures to tackle child and pensioner poverty, which might imply significant tax increases in the long run, and adopting a much tougher stance on public spending growth, particularly but not only in lower priority areas. The new Comprehensive Spending Review planned for 2007 will provide a good opportunity for the Government to begin to get to grips with these tough choices.”
The analysis suggests that a working age employment rate approaching 90% would be needed to stabilise public spending in 2050 at current levels of around 42% of GDP. If instead the average employment rate was 75% for 16-64 year-olds, the analysis indicates that total public spending could rise to just under 50% of GDP by 2050, or just under 47% of GDP with an 80% employment rate (see Table 1 below for more details). The most important factor driving this spending increase is the likely upward trend in health costs, which could rise by around 6% of GDP by 2050, assuming a 75% employment rate in that year (see Table 2 in notes below).
The analysis also emphasises, however, that there are considerable uncertainties surrounding these projections and significant scope for governments to influence these outcomes. Higher than expected longevity, for example, could increase public spending by a further 2% of GDP in 2050, though this might be offset in part by a combination of increased migration and a higher employment rate for those aged over 65. Higher productivity growth could also mitigate the rise in the public spending to GDP ratio, but only to the extent that it did not feed through into higher real earnings growth, which would be likely to push up public spending growth in a broadly proportionate manner. Efficiency gains within the public sector, and policies aimed at controlling the rise in health costs in particular, might also be able to moderate the projected rise in public spending to some degree, although it is always open to debate how far such cost savings can be achieved without compromising the quality of public services.
ENDS
Notes to Editors:
1. Copies of the report can be obtained from Caroline Underwood in the PricewaterhouseCoopers press office on telephone 020 7212 3097 or email caroline.underwood@uk.pwc.com. 2. PricewaterhouseCoopers (www.pwc.com/uk) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP a limited liability partnership incorporated in the United Kingdom. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited. 3. 3 Table’s attached summary below : Table 1 below summarises projected rises in total public spending as a share of GDP for alternative employment rate assumptions in 2050. Table 2 below summarises how these public spending projections break down between key categories for the case of a 75% working age employment rate. Table 3 provides an illustration of one possible set of changes to male and female employment rates by age group needed to achieve an average working age employment rate of 80% in 2050. The scale of the increases needed illustrates that the 80% target, although not impossible given the right mix of policies, is likely to prove challenging. These issues are discussed in detail in the annex to the full report.
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com/uk) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP a limited liability partnership incorporated in England. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.
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