Another fiscal crisis by 2019

 29 November 2010

· Despite the coalition government’s spending reforms, public spending is set to face huge rises due to future commitments on healthcare, welfare, pensions and education

· These commitments, combined with the pressures of an ageing population, could result in a fiscal crisis in the UK along Irish lines as early as 2019

· The Adam Smith Institute calls for a radical reform of the welfare state to avoid this fiscal emergency

In a report released today the Adam Smith Institute warns that the government’s future commitments on healthcare, welfare, pensions and education are unsustainable. Spending in these areas has continually grown, and will continue to face mounting pressure due to an ageing population. As a result, the official debt figure is in reality only a fraction of the story - far greater are the off-the-books future obligations that the government has guaranteed in these areas. The coalition’s spending cuts will not be enough to stave off another fiscal crisis. Instead the government needs to transform intergenerational expenditures (1) and the way we view the role of the state.

According to the calculations in the Institute’s report, ‘On Borrowed Time’ by Miles Saltiel, there are three possible scenarios for the UK’s fiscal outlook. The worst, where the Comprehensive Spending Review is followed to 2015-16 and all the ‘proceeds of growth’ are used to fund higher public spending thereafter, would result in fiscal crisis(2) by 2019. The second scenario, where the proceeds of growth are split 50:50 between spending increases and debt reduction from 2015-16 onwards, would only result in fiscal calamity being delayed until 2031. In contrast, the third scenario, where public spending is held constant and all the proceeds of growth are devoted to debt reduction, would lead to the national debt being eliminated in 2041.

The Adam Smith Institute favours the third scenario and makes a number of recommendations within the report on how the government could achieve such spending restraint. The proposals would see the transformation of the role of the state away from the insurer of first resort towards being a safety net for the poorest. The vast majority of people would provide for themselves, whilst the welfare state’s focus will only be on the most needy within our society.

The report identifies healthcare as a key area needing radical transformation. Miles Saltiel, author of the report and award-winning analyst, proposes that the government should mandate a minimum healthcare package that everyone would be obliged to buy, and would fund premiums for those unable to afford them themselves. Beyond that, the health system would be private. All service providers – such as hospitals – would be privatized, which he calculates would raise one-off proceeds of £236bn after recapitalising PFI obligations of £28.9bn.

On welfare, the report proposes the introduction of a supportive tax and regulatory regime to foster private provision of incapacity, income and mortgage insurance. State support would be a time-limited last resort and conditional on intervention to get claimants back into work. Suggestions on how to reform education and pensions (3) are also included in the report, in an attempt to replace run-away costs with self-limiting systems that focus on innovation and value for money.

Dr Eamonn Butler, Director of the Adam Smith Institute, says: “We cannot keep voting ourselves generous pensions, healthcare and other benefits and vainly hope that our children will happily pick up the bill. It's time we got realistic on the scale of the problem, forced politicians to fess up to the future costs of new policies, and brought in rules to make sure that future generations cannot be saddled with the cost of our extravagances.”

ENDS

1. Intergenerational expenditures are commitments to spending in healthcare, education, pensions and welfare.

2. Fiscal crisis is defined as when the UK’s accumulated debt exceeds the credit watch threshold of 1.0xGDP. At this threshold credit rating agencies give notice of risk of downgrades in government securites, e.g. gilts.

3. The key proposals for education and pensions are as follows:

Education: state providers would be privatized, and a voucher system introduced for primary and secondary education. Tertiary establishments – such as universities – would be re-chartered to establish non-state basis.
Pensions: people would be compelled to save a set percentage of their income in private retirement accounts, as occurs in Chile, Singapore, Australia and (on a more limited scale) Sweden, and would be given tax incentives to make further, non-compulsory contributions. Eventually, the state’s role would be confined to providing a safety net for elderly people with insufficient savings.

· On Borrowed Time is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. You can download the report for free here: www.adamsmith.org/files/On_borrowed_time_ASI.pdf

· The Adam Smith Institute is the UK’s leading libertarian think tank. It engineers policies to increase Britain’s economic competitiveness, inject choice into public services, and create a freer, more prosperous society. For more information on our work, go to www.adamsmith.org <http://www.adamsmith.org>

Media Contact

info@adamsmith.org

07584 778 207

0207 222 4995