Foundations of prosperity and the fiscal time bomb

Plus: Is it time to replace the NHS with a social health insurance system?

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Sep 22, 2024

Last week, the Office for Budget Responsibility released its latest “Fiscal risks and sustainability” report. As usual, it made for sobering reading.

The most important takeaway is that the OBR sees public spending rising from 45 to 60 percent of GDP over the next 50 years, thanks largely to the fiscal impact of an ageing population and rising debt costs, while tax revenue flat-lines at about 40 percent of GDP. The result is public debt spiralling to three times national output.

Of course, any such modelling is very sensitive to the assumptions behind it. But even if the details should be taken with a pinch of salt, the underlying reality – that we are running a pay-as-you-go welfare state with a rising number of retirees for every worker – cannot be ignored.

Covering a 15 percent of GDP fiscal gap with increased taxes isn't a realistic prospect. The whole hard-left tax agenda would only get you a fraction of the way there. It would actually take something like doubling income tax and national insurance for everyone – and hoping people don't just stop working.

On the spending side, it is fairly obvious where we want to end up – but much harder to work out how to get there. Essentially, we need to shift to a pre-funded model for various old age benefits, so that spending on the elderly is funded from balances accumulated (and invested) during people's working lives. The trouble is the transition – how do you manage young workers paying simultaneously for today's OAPs while also funding their own retirement?

Perhaps the most striking thing in the OBR report, though, is the following conclusion on productivity growth: "A full 1 percentage point increase, equivalent to a return to pre-financial crisis rates of productivity growth, could keep debt below 100 per cent of GDP throughout the next 50 years."

In other words, get back to where we were 15 years ago in terms of economic growth, and the fiscal sustainability problem largely goes away. That this is not every government's biggest priority – not just rhetorically, but in terms of concrete action – will never cease to amaze me.

A new essay by Sam Bowman, Ben Southwood, and Samuel Hughes – released this week to much online acclaim – suggests going for growth need not even be that hard. The central claim of their "Foundations" is that much of our growth-sapping lack of investment has one simple cause: the fact that our planning system and other regulatory structures systematically prevent profitable investments (in real estate, energy, and transport infrastructure) from taking place.

In the short run, a huge amount of market-driven economic activity simply doesn't take place. Longer term, we are left with expensive, unreliable energy that undermines industry, housing costs that leave people little to spend or invest elsewhere, and fewer of the agglomeration effects that drive innovation and productivity in modern economies.

The government's new plan for urban densification – trailed in the press this weekend – is a very good start, and potentially heralds a more radical approach than I expected. But if we want to return to robust growth and avert long-run fiscal disaster, it will need to be accompanied by a much wider programme of land-use and (crucially) energy market liberalisation.

Tom Clougherty
IEA Executive Director & Ralph Harris Fellow

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“Scrapping” the NHS & the Gender Pay Gap Myth, IEA Podcast, Acting Director of Communications Reem Ibrahim, Executive Director Tom Clougherty, and Editorial Director Kristian Niemietz, IEA YouTube

Replace the NHS to save lives, says new IEA paper

Reforming the National Health Service into a social health insurance (SHI) system could boost UK health outcomes to European levels.

There has been a huge shift in public opinion, with Britons now increasingly likely to say the NHS is worse than healthcare systems in other European countries.
In the last year before Covid, the UK had the second-highest rate of treatable avoidable mortality Western Europe.
The NHS has consistently ranked poorly in international comparisons for decades.
In terms of clinical outcomes, other systems tend to outperform the NHS, and they have done so for as long as we have data. This is not simply the result of better funding.
Countries including the Netherlands, the Czech Republic, Slovakia, and (the former) East Germany have already reformed NHS-type systems into SHI systems.

Press Release

Full Publication

“Want Better British Healthcare? Watch This Now”, IEA YouTube
The IEA’s report was featured in a debate on the Jeremy Vine Show on Channel 5:
‘Scrap NHS to halt high levels of deaths that are avoidable’, IEA research in The Telegraph.

“Should we replace the NHS?”, IEA Editorial Director Kristian Niemietz on LBC:
“Replace the NHS with social health insurance”, IEA research in the Express.

Replace the NHS with Social Health Insurance says think tank, IEA research in City AM.

“Older and poorer” – the UK’s future?, IEA research referenced in CityAM.

“The charts show that the NHS should be privatised”, IEA research in the Telegraph.

The report was also referenced in GB News, Times Radio, LBC, BBC Radio Bristol, and in About Manchester, the Carer, Mahalsa, and the Daily Brit.