The nightmarish state of the public finances makes NHS reform even more urgent
While Westminster was awaiting the first lines of Theresa May’s Brexit speech yesterday morning, the government’s fiscal watchdog issued a devastating judgement on the long-term health of the country’s finances.
According to the Office for Budget Responsibility (OBR), the accelerating cost of the NHS will double the national debt relative to GDP by the middle of the century. By the 2060s, the UK will be reaching levels of borrowing not seen since the Second World War.
Pity the Treasury official who will now be responsible for setting out the chancellor’s options. Want to close the fiscal gap by raising taxes? Take your pick from increasing income tax and national insurance by a third, doubling VAT, or tripling fuel duty.
How about repairing the damage through spending cuts? Scrapping the Department for Education and the UK’s foreign aid commitment will get you most of the way there, but it is probably safest to throw in the Department for Business, Energy and Industrial Strategy for good measure.
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What about the benefits system: surely there must be some fat to trim? Perhaps, but not a great deal. To get anywhere close to the £84bn implied by the OBR’s forecasts, big ticket items such as the State Pension would have to be cut.
Faced with these nightmarish choices, the political temptation towards inaction will be intense. But doing nothing is the worst option of all. Every step that is taken today will lessen the burden on future generations. And there is a lot that the current crop of policymakers could do.
First, the number one domestic priority in the foreseeable future must be to transform the value for money of our healthcare system. Last week, Nick Macpherson, a former permanent secretary at the Treasury, argued that future NHS funding must be tied to successful reform. He is right. Moving care out of hospitals and into the community is the only way to curb runaway NHS costs. This will raise intensely political questions, regarding A&E and even hospital closures. But standing still on healthcare reform is simply not an option.
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Second, ministers need to address the rising cost of the State Pension – the other important contributor to the country’s fiscal predicament. The “triple lock”, which uprates the State Pension by the highest out of inflation, wages and 2.5 per cent, puts systematic upward pressure on the pensioner budget, even when increases in the retirement age are priced in. We estimate the cumulative cost of the policy will reach £20bn this year. The sooner the triple lock is scrapped, the better.
Third, the Treasury needs to take more seriously the slow-burning threats to the country’s public finances. The political cycle is partly at fault here – chancellors are understandably focused on making sure the numbers add up immediately before an election. But the policy infrastructure could be changed to reflect these warped incentives. Incorporating the OBR’s long-run projections of net debt into a new fiscal rule would be a good start.
Theresa May ended her Brexit speech with a call for Britain to become a lower tax, economically vibrant competitor to the Continent. Her words will fall flat unless her government takes to heart the OBR’s warnings.