We will need decades of austerity, not years

If governments had to look forward in their accounting – like companies do – the numbers would be shocking. For example, if the US were to close its fiscal gap and set tax rates so that in the long-term it would meet all its future spending without being in debt, it would have to more than double existing Federal payroll taxes.

The situation in the EU is worse as the number of workers per retiree is projected to fall below two by the next century. In the UK, for example, to balance the books over the long term, health and social protection spending will have to be cut by one half compared with current plans or taxes increased by a staggering 14 per cent of national income. Of course, increasing taxes from 38 per cent to 52 per cent of national income will simply be impossible without choking off economic growth and actually reducing tax revenues.

In reality, our politicians are likely to impose both tax increases and spending cuts – though the latter would be preferable. Hopefully austerity will be combined with radical policy change to allow people to make their own funded provision for health, long-term care and pensions. Some reforms are already in train, such as raising the state pension age. Other reforms – such as the triple lock on pensions – make things even worse.

We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people. There aren’t many countries for them to go to that do not have the same problems – they could try Estonia, Australia, Chile and Switzerland; but it is a short list.

Inflation and faster economic growth will not get us out of these problems because many of the expenditures are related to inflation and, to some extent, to growth itself. Expectations of, for example, better healthcare will also rise if the economy grows. Indeed, unless there are radical cuts in government spending, it is highly likely that there will be little economic growth in the coming decades in any case.

The calculations published in The Government Debt Iceberg are not some irrelevant machinations of US boffins trying to frighten us into reducing the size of government. These numbers are compatible with other work produced independently and using different methods. The King’s Fund, for example, has estimated that health and social care could consume nearly one fifth of national income in 50 years’ time. When you add on rising debt interest and pensions costs, such spending commitments look pretty scary.

We might get lucky and innovate our way out of some of these problems. Past innovations have raised the cost of healthcare; future innovations might reduce it. However, the basic message is that systems of financing healthcare and pensions in the last 50 years were flawed. We will pay the price over the next 50 years. We should reform these systems with great urgency.

Philip Booth is editorial and programme director of the Institute of Economic Affairs and professor of Insurance and Risk Management, Cass Business School, City University

Read more: UK faces 'crippling' tax rises and spending cuts to fund pensions and healthcare

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