Can we reduce the national debt without getting control of spending on pensioners?

Following the recent spending review, David Kingman asks whether we can ever make a serious dent in the national debt if we don’t get on top of pensioner benefitsThree piggy banks with retirement savings message

Last week saw the unveiling of the latest round of public spending cuts by Chancellor George Osborne, which confirmed that the Coalition Government’s austerity programme will continue until at least 2015–16.

A brief summary of the specific cuts he announced can be found here. In truth, despite attracting plenty of attention, these cuts were relatively small beer as a proportion of total government expenditure, amounting to just £11.5 billion. Most commentators were more interested in the politics which surrounded Osborne’s announcement, particularly whether Labour would confirm (which they later did) that they intend to match these spending plans should they win the next general election in 2015.

The politics of these cuts were also interesting in a different sense, with regard to the things which were never on the table because they have been “ring-fenced”. In terms of the electoral calculation behind ring-fencing, the grey vote appears to once again be making its influence felt.

Rod for Osborne’s back

IF has argued previously that neither party is being honest with the electorate about the scale of the cuts which will be needed if the national debt is ever to be brought back under control.

Little attention has been paid to the fact that spending reviews only cover one type of government expenditure – so-called “Departmental Expenditure Limits” – which are the annual budgets that get allocated to each of the different departments. It completely ignores the other kind of expenditure, which is known as “Annually Managed Expenditure” – this essentially covers things where there is no real spending limit because how much the government has to spend is determined by entitlements or liabilities, such as debt interest and pension payments.

In 2010, total government spending was around £700 billion, of which £400 billion came under Departmental Expenditure Limits and £300 billion was Annually Managed Expenditure, so total spending was split roughly 60-40 between the two. Since then, Annually Managed Expenditure has risen almost as quickly as Departmental Expenditure Limits have been cut, meaning that total government spending still accounts for almost exactly the same proportion of GDP as it did before the austerity drive began.

Clearly, this is a headache for George Osborne. Yet the Coalition Government has also produced a rod for its own back by ring-fencing spending on several extremely important categories of government expenditure, including schools, the NHS and overseas aid. David Cameron has also repeatedly pledged not to cut welfare benefits for pensioners during the current parliament, so in effect these have been ring-fenced too.

There are good arguments in favour of protecting all of these things. Yet the problem for the government is that the items which have been ring-fenced add up to an extremely large amount of government spending – almost 60%. This means that a highly disproportionate burden has fallen on those departments which are not ring-fenced, such as the Foreign Office, Transport and Culture, Media and Sport.

It also means that George Osborne is effectively only able to pursue an austerity agenda against roughly a quarter of total government spending – so in the future, something will almost certainly have to give.

Pensioner Benefits

It appears increasingly likely that at some point, once all the relatively easy targets for austerity have been trimmed down to the bone, the government will only be able to get control of the national debt by radically reducing spending in some of these really key areas.

It will be in the UK’s national interest, and in the interests of democracy more generally, if this is accompanied by a proper national conversation about how the pain that comes with downsizing government ought to be divided up.

The BBC published some interesting statistics this week from the Institute of Fiscal Studies, which presented the four major drivers of public spending growth in the long term.

They show that in 2004/05, four areas accounted for roughly 50% of total government spending: healthcare (18%), non-pensioner benefits (15%), pensioner benefits (12%) and debt interest payments (5%). By 2017/18, these four areas will account for almost 60% of total spending, with spending on healthcare and pensioner benefits rising by almost £60 billion in real terms, to a large extent because of the ageing population. The cost of non-pensioner benefits is only expected to rise by 0.2% during this period, while debt interest is not directly under the government’s control.

The future of the NHS looks like it will be fraught with controversy over rising demand and the limited resources which exist to service it. Not just the ageing population, but a range of other pressures too – obesity, diabetes, high birth-rates, new technologies – all point to more and more expense, which will doubtless engender a debate over whether we can still afford for all services to remain free at the point of use.

Pensioner benefits look set to become even more of a battleground. George Osborne did announce that pensioner benefits, with the exception of the basic state pension, would be included in the new “welfare cap”, which has been designed to limit the amount (in cash terms) which the government can spend on welfare during each parliament. However, it remains to be seen how this will work in practice, especially since the vision which he laid out for the welfare cap didn’t suggest it will have much in the way to teeth to force future governments to obey it.

Already, there have been accusations that this will prove meaningless unless pensioner benefits are included. What seems certain is that if we don’t find some way of limiting the growth in expenditure on pensioner benefits, future generations will have to grapple with vast cuts to other areas of public spending.

Unless our national pie starts getting bigger again, then the wars over who gets to enjoy the larger slices are only just beginning.

Posted on: 5 July, 2013

8 thoughts on “Can we reduce the national debt without getting control of spending on pensioners?

  1. Andrew

    If by “getting control of spending on pensioners” you mean not honouring contractual promises and paying contributory benefits to the uttermost farthing – forget it. We have votes, we use them, and we will not be cheated.

  2. john

    Andrew,

    You have the huge baby boomer sense of entitlement ‘ gimme, gimme, gimme.

    You’re not being ‘cheated’, far from it.

    Your greedy generation has awarded ITSELF a whole host of additional benefits, which it never provided for previous pensioner generations.

    Its simple Andrew, during YOUR working years you didn’t contribute enough to provide a Free Bus Pass, TV license etc etc for previous pensioners. Yet you DEMAND it yourself & believe you are somehow entitiled to it. This is the definition of intergenerational fraud.

  3. Andrew

    So, John, are you saying the public-sector pension I have paid for should be cut? I signed the agreement for it and so – through my employer – did the State, indexation and all. When I choose to draw it I am entitled to it. It’s called contract. It is no different to money in NSI.

    As for travel; the sixty pass has existed in London throughout my working life – so I have paid fares, rates, poll-tax and council tax for previous over-sixties and now that I am sixty, yes, it’s my turn. I never grudged it to my predecessors – free travel keeps older people healthy (and perhaps that is what troubles you, you’d rather pensioners died off sooner) – and I take it ill that people like you grudge it to me. You will want it one day.

    TV licence I will grant you – it does not interest me!

  4. john

    The public sector system is a ‘pay as yer go’ system. Current contributions pay for current pension payments.

    It became very apparent in the 1980s, that due to increasing life expectancy, current public sector pension arrangements were unaffordable. Sensible countries like Holland, made sound changes which took intergenerationa fairness into account.

    Unfortunately our governments have stuck their heads in the sand, failed to modify our public sector pensions and left younger generations with the bill.

    Successive UK goverments have done this because YOUR grabbing generation, threathen to withdraw your vote, everytime policies don’t go YOUR way. You continue to do this now.

    The truth is Andrew, that your pension contributions, weren’t nearly big enough to justify the amounts you are now receiving. This is intergenerational fraud, which you have forced the goverments to commit.

    In 1980 Andrew, when you were in your late 20s 30’s. The government (tories), broke the state pension – index link, to help reduce the tax burden for you.

    The truth is that during your working lives, YOUR generation provided as LITTLE as possible for its pensioner generation. You paid as little as possible to the WW2 generation of pensioners. Yet you DEMAND so much yourselves. This is intergenerational fraud.

  5. Andrew

    I signed up for what was offered. So answer the question, John: should the contract be kept or not?

    By all means change the rule for new entrants; they can accept or not as they see fit. But don’t cheat people just because they are claiming – or like me will soon claim – what was committed to. That would be intergenerational fraud.

    As for how I “treated” previous generations of pensioners: you don’t know how I felt or how I voted. And I have to say that when governments do what the voters want that is democracy in action, and not a fraud.

  6. Andrew

    Let me add that like most of my generation (or any other) I am not an actuary! I did not know that life expectation was going to increase; I did not compare my contributions with the likely cost and payout. I signed on the dotted line and paid what I had agreed to pay. Now – or when I retire soon – I expect to receive what the State – which had actuarial expertise at its disposal – agreed to pay. It’s not rocket science.

  7. Stu

    Andrew, where would you propose the money comes from for your pension? More public debt or a higher tax burden on the working populace? Either way, you’re asking younger generations to fuel your prosperity, while simultaneously saying they should not have any input over how prosperous you should be. That is quite the commitment you signed us up for.

    I don’t think anyone is proposing dumping you in to poverty. When the pension renegotiation happens it has to be a fair deal for everybody – an amount that you can live off and an amount that the current and future working populace can afford to pay.

    It would be unreasonable to expect anything else given the circumstances. Should the working populace be pushed in to poverty so you can have a comfortable retirement?

  8. Andrew

    Stu: What pension renegotiation? It has happened. The Government has raised public-sector contributions and cut indexation to CPI. And in exchange it promised now further changes for 25 years. And that’s that.

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