The challenge of fiscal sustainability
Paul Johnson
November 3 2011
© Institute for Fiscal Studies
Outline
• How the pattern of spending has changed over time
• The current squeeze
• Long term debt position
• Changes in spending over the next few years
• Longer term projections
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Continuing change in the shape of the state
• 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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Public spending in 2010-11
10%
Social protection
1%
3%
Personal social services
29%
2%
Health
Education
6%
Transport
Defence
5%
Public order and safety
Gross debt interest
6%
4%
3%
Housing
TIEEE
AFF
13%
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18%
Other
Public spending in 1978-79
Social security
9%
1%
Personal social services
23%
Health
9%
Education
Transport
6%
2%
Defence
Law, order & protection
10%
10%
Gross debt interest
Housing
TIEEE
4%
12%
10%
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4%
AFFF
Other
Over the next few years
• An unprecedented squeeze on public service spending
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Public service squeeze biggest in over 50 years
Annual percentage real increase
15
10
5
0
-5
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Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
2015–16
2010–11
2005–06
2000–01
1995–96
Historic
1990–91
1985–86
1980–81
ConLib
1975–76
1970–71
1965–66
1960–61
1955–56
Labour
1950–51
-10
Over the next few years
• An unprecedented squeeze on public service spending
• Returning it to 2000 levels as a percentage of GDP
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Taking us back to 2000 levels as % of GDP
30
March 2010 Budget
25
20
15
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Note: Figure shows Departmental Expenditure Limits (DELs) as a share of
national income under current policies.
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–2000
10
1998–99
Percentage of national income
October 2010 Spending Review
But debt not back to pre-crisis levels for a generation
Budget 2008
No policy action
Inherited policy
Current policy
Current policy – including estimated impact of ageing
160
120
80
40
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Notes and sources: see Figures 2.6 & 2.7 of the February 2011 IFS Green Budget.
2039–40
2034–35
2029–30
2024–25
2019–20
2014–15
2009–10
2004–05
1999–2000
1994–95
1989–90
1984–85
1979–80
0
1974–75
Percentage of national income
200
Over the next few years
• An unprecedented squeeze on public service spending
• Returning it to 2000 levels as a percentage of GDP
• With different departments affected differently
– And health again relatively protected
– And its share of spending continuing to rise
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Pattern of DEL changes 2010-11 to 2014-15
International Development
37.8%
Energy and Climate Change
6.5%
NHS (England)
1.0%
Defence
-8.2%
Education
-11.9%
Total
-11.5%
Transport
-14.5%
CLG: Local Government
-20.7%
Home Office
-22.0%
Justice
-27.2%
Environment, Food and Rural Affairs
-27.6%
Business, Innovation and Skills
-31.2%
Culture, Media and Sport
CLG: Communities
-100%
-46.1%
-71.3%
-80%
-60%
-40%
-20%
0%
Percentage real increase, 2010–11 to 2014–15
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20%
40%
No change in „priorities‟
Per cent of public service
spending
30%
NHS
25%
Education
20%
15%
Defence
10%
Public order
and safety
5%
Transport
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
0%
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Notes and sources: see Figure 6 of Crawford and Johnson (2011).
OBR projections going forward
• Based just on demographic change
• Otherwise central forecasts assume health spending rises just
with GDP
– 2% a year
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OBR central projection
% 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
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OBR central projection
% 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
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OBR central projection
% 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
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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
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2060-2061
2058-2059
2056-2057
2054-2055
2052-2053
2050-2051
2048-2049
2046-2047
2044-2045
2042-2043
2040-2041
2038-2039
2036-2037
2034-2035
2032-2033
2030-2031
2028-2029
2026-2027
2024-2025
2022-2023
2020-2021
2018-2019
2016-2017
2014-2015
2012-2013
2010-2011
Percentage of non-debt interest spending
OBR projections of spending to 2060
100%
90%
Education
80%
70%
Other spending
60%
Public service pensions
50%
40%
Other social benefits
30%
20%
Pensions and pensioner
benefits
Long-term care
10%
0%
Health
Going forward state is set to change further
• OBR projections suggest that health and pensions
alone could account for more than a half of noninterest spending by 2060
• On these assumptions education spending falls from
14% to 11% of the total
• Unless
– Total spending increases
– Other spending falls even more sharply
– Health spending is reformed and reined in
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Conclusions
• The shape of public spending changes over time
• Last 30 years have seen health and social protection spending
increase a lot
• Defence, “economic” spending and housing have taken a big hit
• Going forward there are continued pressures on health and other
age related spending
• If accommodated the shape of the state will alter beyond
recognition
– And if it is not also to increase in size we‟ll need to find some new
losers
© Institute for Fiscal Studies
The challenge of fiscal sustainability
Paul Johnson
November 3 2011
© Institute for Fiscal Studies