Monday, 20th August 2018
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John Smiles

Population ageing raise taxes or cut services?

For many years, government, interest groups, pension providers and financial advisers have spoken about the impending 'pensions time bomb'.

A recent report from the Office for Budget Responsibility (OBR) in the UK casts a different slant on the same problem.

The OBR carries out a fiscal sustainability report every year on the basis of current Government policies.

It shows the future cost of the public services Government has to provide by law together with a projection of its revenues.

Debt interest is the only large item of UK public expenditure that is contractually bound but it is probably safe to assume that no future Government will be able to reduce public spending on pensions; long-term care; health; education and welfare payments.

The cost of most of these services is primarily determined by demand which is linked to the age structure of the population and is easy to forecast.

In the report, UK Government revenues are projected to remain close to 36% of Gross Domestic Product (GDP) for the next 50 years.

Spending on old age, health, education, welfare and debt interest is set to rise, starting in 2020, from 26.7 per cent of GDP to 44.5 per cent in 2067-68.

These OBR projections assume no service quality improvements.

The projected rise in core spending means in 2020 the Government can spend only 10% of GDP on other non-core services; by 2030 they will only have 7.5% to spend and by 2050, there will be nothing left.

Population ageing is so expensive that in just over 30 years, the UK will have no money for defence, police, transport investment and agricultural and business support. Local authorities would no longer be supported to fix roads, no money for new social housing, the arts, science, etc.

In 2015, OBR projected the availability of 5% of GDP for non-core services in 2065; in 2017 it projected the money would run out by 2056, in 2018 that cash runs out in 2050.

Ireland's population is now starting to age, and we will soon be facing similar problems.

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