Demographics are destiny. Britain must reform public services – or face catastrophe
Something is missing from our discussions on tax and spending. Many people are puzzled or frustrated by the way that increased resources don’t seem to be translating into improved public services.
Take GPs, for example. The Government recently hit its manifesto target to increase the number of GP appointments by 50 million each year. That’s equivalent to 44 more appointments at each practice on each working day. Yet GPs are not being carried shoulder-high across the land by cheering crowds. Why? Because demand is also growing.
As the primary care recovery plan pointed out, “the number of people in England aged 70 or over is up around a third on 2010, from 6.1 million to 8.1 million, and this group has on average five times more GP appointments than young people”.
It’s worth saying that I am not a pessimist about public service reform. Spending per head and demographics aren’t the only things that matter, and it is often possible to do more with the same budget. Schools in England, for instance, have soared past their peers in Scotland and Wales in the international rankings not because they get more money, but because of a consistent 20 year programme of reform to push up standards and spread techniques that work.
But it is also undeniable that the impact of demographics is massive. Changes in the age profile of the population have given politicians helpful tailwinds in the past, and are now starting to deliver powerful headwinds.
Perhaps the most important element is the impact of age. Children consume a little more spending than working age adults do, thanks largely to the costs of school and healthcare. Retired people require a great deal more spending, with higher costs for pensions, social care, and healthcare.
On the receipts side, children pay essentially no tax. Adults then earn and spend more, leading to a peak in tax receipts in middle age. Then, as they approach retirement, they work less, spend less, and their receipts fall away.
These facts are responsible for a huge problem facing Britain today. In 1953, the proportion of the population made of pensioners was much lower. It increased until 1980, flatlined until 2010, and is now increasing rapidly, with the fastest growing group made up of the very elderly, over 85. The proportion of working age people, on the other hand, fell from the 1950s to 1980, rose again, and since 2010 has started to fall. The population of young people has been falling since the mid 1970s.
These trends have had huge implications for the public finances. From 1953 to 1970, demographics made it harder to raise tax revenues. From the mid 70s to the financial crisis, they made it easier. Now they’re making it harder again.
On the spending side, too, there are considerable impacts. If the population had the same age structure it did in 1953, I calculate that the Government could have spent about 9 per cent less than it did in 2021, and still delivered the same services for each group.
Since 2010, in other words, we’ve been running up the down escalator. As the population share of older people grows, spending rises. And as the working age population share falls, tax receipts shrink. And if you think this period has been hard going, you ain’t seen nothing yet. The coming decades will put even greater upward pressure on spending, and downward pressure on receipts.
As this pressure rises, we’re going to need to have a more nuanced discussion about public services. Policy decisions aren’t the only things driving tax levels and service quality. The ageing of society is also having huge effects on demand, and is arguably the main cause of the rising tax burden.
Dealing with this may require abandoning a whole herd of sacred cows. Will we, for example, be able to afford our aid spending target? Or continue without reform of working age benefits? While migration isn’t the answer to our demographic challenge, can we find a way to make the system more selective, so that it’s a positive for the public finances? Or to support parents to have more children, and provide the workers we’ll need in the future?
Until these questions are front and centre in the public debate, and until the full effect of demography is reckoned with, we will be wasting our time on analysis that is doomed to fail.
