Paul Johnson, Director, Institute of Fiscal Studies, gives a background to economic growth in the UK and discusses what future NHS spending could look like.

1. Looking into the long-term
July 14 2012
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2. Long-term forecasts
• Can give a sense of direction, risks and pressures
– Show us what sort of choices we will need to make
• The OBR’s fiscal sustainability report is hugely valuable in this
respect not least in the simplicity of its message
– Demographic change will make public finances unsustainable in the
long run without further tax increases or spending cuts
• Focus on
– Economic growth – how should we think about the future?
– Spending projections
– How the state has changed
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3. Economic growth
• 2% a year growth and economy doubles in size every 35 years
– at 2.5% doubling occurs in 28 years
• Real household incomes have slightly more than doubled since
1977
– Despite recent drops
• On average each generation is about twice as well off as the one
before
© Institute for Fiscal Studies

4. Incomes have risen for all family types
800
600
400
1977
2010
200
0
single couple single no couple no couple 2
pensioners pensioners kids kids kids
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5. Durable ownership also much higher
100
80
60
40
1977
20 2010
0
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6. Other big changes
• Proportion of working age population with a degree
– 1977: 3%
– 2011: 24%
• Proportion working in manufacturing, mining, agriculture
– 1977: 37%
– 2011: 13%
• In finance and other services (including health and education)
– 1977: 31%
– 2011: 52%
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7. So the future will look different
• But growth doesn’t get us out of the cost of the welfare state
– Pay likely to rise with economy wide earnings
– Benefits also over the long run
– Expectations increase
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8. £ billion, 2012–13 prices
100
120
140
0
20
40
60
80
Source: Figure 1
1949−50
1953−54
1957−58
1961−62
1965−66
real terms
1969−70
1973−74
1977−78
% national income
1981−82
Historical UK NHS spending
1985−86
3.3%
1989−90
AARG:
1993−94
Average Annual Real Growth: 4.0%
1997−98
2001−02
6.4%
2005−06
AARG:
2009−10
0
2
4
6
8
10
12
14
Percentage of national income

9. So what are the key OBR projections?
• Based just on demographic change
• Otherwise central forecasts assume health spending rises just
with GDP
– 2% a year
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10. OBR central projection (2011)
% of non-interest spending 2010−11 2060−61
Education 14.3 12.0
Long term care 2.9 4.8
Public service pensions 4.5 3.4
Other social benefits 14.0 12.0
Pensions and pensioner benefits 15.6 21.8
Health 18.6 23.5
Other non interest spending 30.1 22.5
© Institute for Fiscal Studies

11. And if health spending grows 1% p.a. over GDP
% of non-interest spending 2010−11 2060−61
Education 14.3 10.6
Long term care 2.9 4.2
Public service pensions 4.5 3.0
Other social benefits 14.0 10.6
Pensions and pensioner benefits 15.6 19.3
Health 18.6 32.1
Other non interest spending 30.1 20.0
© Institute for Fiscal Studies

12. So what are the key OBR projections?
• Based just on demographic change
• Otherwise central forecasts assume health spending rises just
with GDP
– 2% a year
• But there are huge uncertainties over much shorter periods
© Institute for Fiscal Studies

13. English NHS spending
(percentage of national income)
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
2006–07
2007–08
2008–09
Outturn
2009–10
2010–11
NHS: Real freeze
NHS: LR Average
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
2017–18
SR2010 Plans
2018–19
2019–20
2020–21
2021–22
NHS: constant % national income
Scenarios for English NHS spending to 2021-22

14. And big change is possible
• Health, social protection and education account for
two thirds of public spending
• Up from less than half in 1979
• Increase results from health and social protection
– Education has merely maintained its share
• Defence, housing and support for business and
industry have taken the strain
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15. Public spending in 2010-11
10% Social protection
1%
Personal social services
3%
2% 29% Health
Education
6%
Transport
Defence
5%
Public order and safety
Gross debt interest
6%
4% Housing
3% TIEEE
AFF
13% 18%
Other
© Institute for Fiscal Studies

16. Public spending in 1978-79
Social security
9%
1% Personal social services
23%
Health
9%
Education
Transport
6%
2% Defence
Law, order & protection
10% Gross debt interest
10%
Housing
TIEEE
4%
12% AFFF
10%
4% Other
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17. Uncertainty is pervasive
• As we have seen recently economic shock have huge effects
• Note also what we found out about size of the population in
England this week
– We didn’t know to within half a million contemporaneous size
– And we didn’t predict the scale of increase since 2001
• Increases in life expectancy have been consistently and
substantially under-predicted over last 30 years
• One absolutely key variable will be employment rates of those
over 55
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18. Health and labour force participation men 55-59
© Institute for Fiscal Studies Banks, Blundell, Bozio and Emmerson (2011)

19. But that is no reason for inaction
• Demographic change will impose costs
• Some forms of tax revenue will fall
• In the long run it is clear we will need to make choices
– We have time to adjust
• But government needs to be transparent and consistent
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20. Despite recent travails we can hope
• This is a nightmare, which will pass away with the
morning. For the resources of nature and men's
devices are just as fertile and productive as they
were. The rate of our progress towards solving the
material problems of life is not less rapid. We are as
capable as before of affording for everyone a high
standard of life ... and will soon learn to afford a
standard higher still. We were not previously
deceived.
» Keynes 1930
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