The OBR predict steeper increase in health spending than previously thought

policy digest

31 / 01 / 2017

Fiscal sustainability report
Office for Budget Responsibility, January 2017

The Office for Budget Responsibility (OBR) has produced the latest in its regular Fiscal Sustainability Reports (FSR). This looks beyond medium-term forecasts to consider whether the UK’s public finances are sustainable over the longer term. The outlook is subject to huge uncertainties, but still offers policymakers insight into current trends.

This latest version shows the pressure that is likely to fall on public services due to the effects of an ageing population and the rising prevalence of chronic health conditions. Their analysis shows that an unchanged policy scenario would see the share of national income on age-related spending, such as pensions and health care, grow while government revenues would remain roughly stable. This fiscal position would be compounded by an increase in public sector spending to simply pay the interest on its accumulated debt.

The projections see public spending rise from 35.8 per cent of GDP in 2021-22 to 43.8 per cent of GDP by 2066/67 – an increase of 8 per cent of GDP or £156 billion in current terms. Most of this increase is caused by assumptions on additional non-demographic cost pressures causing health spending to grow. In fact, health spending is projected to rise from 6.9 per cent of GDP in 2021-21 to 12.6 per cent in 2066-67. This is a much steeper increase than in the previous report.

Long-term social care costs also account for the increases, with spending projected to rise from 1.1 per cent of GDP in 2021-22 to two per cent of GDP in 2066-67. This is slightly lower than previously projected, to account for recent decisions by the Government that imply less spending in the long-term. Spending projections have not been amended to account for changes to council tax-financed increases, as these are deemed to only affect the profile over the medium term.

Overall, the OBR identify the importance of the assumptions on non-demographic pressures in their model. They identify, for example, if productivity growth was weaker in the health sector than in the rest of the economy and health spending was increased more quickly to compensate, that health spending would increase by 4.8 per cent of GDP between 2021-22 and 2066-67 - one per cent less than the central projection.

The OBR report also reinforces the main conclusions of its publication at the end of last year on the sustainability of health spending. This identified that health spending has risen as a share of GDP in most OECD countries, including the UK over the past 40 years. It also stated that while there is agreement about the direction of this challenge, there is disagreement over its scale. The biggest source of that disagreement relates to the effect of cost pressures beyond those related to demographics and to the fact that rising incomes are associated with rising spending on health care. A major conclusion of the paper was that when defining ‘unchanged policy’ health spending should increase to reflect growth in other costs in our central projection.

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