1 / 18

Long term public spending trends*

Long term public spending trends*. John Hawksworth Head of Macroeconomics PricewaterhouseCoopers March 2006. *connectedthinking. Agenda. Methodology and key assumptions Total public spending projections Focus on health spending Summary and conclusions.

morton
Download Presentation

Long term public spending trends*

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Long term public spending trends* John Hawksworth Head of Macroeconomics PricewaterhouseCoopers March 2006 *connectedthinking

  2. Agenda • Methodology and key assumptions • Total public spending projections • Focus on health spending • Summary and conclusions

  3. How do you project long-term public spending as % of GDP? • Start with GAD population projections in five year age bands • Assume trend labour productivity growth = 2% per annum • Assume plausible path for employment rates by age band/gender • Derive implied trend GDP growth profile (c.2.25% pa to 2014/15; then c.2% per annum on average over next 40 years) • Input estimates of spending as % of GDP per capita in base year for health, long-term care and education by age band • Make plausible assumptions on trend real growth in unit costs for each of these three spending categories (c.2.5%/2%/2%) • Use separate model to project state pension costs

  4. Summary of long term PwC age-related public spending projections % of GDP Source: PwC main scenario projections (except Treasury for public service pensions)

  5. Comparison of long term PwC and HM Treasury public spending projections % of GDP Source: PwC main scenario projections using Treasury projections for public service pensions and other spending, Treasury long-term public finance report 2005

  6. PwC and HMT projections very similar except for health spending (though even there trends are broadly comparable) % of GDP Source: PwC main scenario, HMT long-term public finance report Note: education spending projections are very similar

  7. Recent projections for UK public spending on pensions, health and long-term care *Two OECD scenarios: ‘cost containment’ and ‘cost pressures’

  8. What drives NHS spending in long run? • Any additional ‘catch-up’ over next 5 years (Wanless: 4.4-5.6% real growth; we assume bottom end of this range) • Pure age effects - more older people -> higher costs (survivors) • Number of deaths -> change in death-related costs • Offset from healthy ageing -> perhaps c.50% of pure age costs • Non-demographic factors: • Income elasticity of demand > 1 (superior good) • Technological advances and relative price effects

  9. NHS spending as a share of national income: 1949/50 to 2004/5 Gross spending (% of GDP) Source: PwC calculations based on data from ONS, Department of Health and IFS

  10. Decomposing UK public health spending growth: 1981-2002(% average real growth per capita per annum) • Total UK public health spending growth per capita: 3.4% • of which: • Age effect: 0.2% • Income effect: 2.3%* • Other effects (residual): 0.9% • Source: OECD (2006, Table 2.1) • *Assuming income elasticity of health spending = 1

  11. Age distribution of NHS spending (estimates for 2004/5) % of GDP per capita *Includes cost of births Source: PwC assumptions based on UK government estimates for 2000 in EPC report scaled up to 2004/5 values to match gross NHS spending plans

  12. Alternative estimates of age structure effects on future NHS spending – may be significantly greater than historic effects Change relative to base year* (% of GDP) *Base year is 2004/5 for PwC, 2005 for OECD and 2004 for EPC; EPC estimate for 2025 is based on extrapolating between 2010 and 2030 estimates. Source: PwC, OECD (2006), EPC(2006); OECD figures exclude adjustment for ‘healthy ageing’

  13. Estimated elasticity of UK health care spending per capita to GDP per capita Source: OECD Health Data 2005 Our base case assumption: income elasticity = 1.2 HM Treasury assumption: income elasticity = 1

  14. Alternative estimates of income effects on NHS spending Change relative to 2004/5 level (% of GDP) Source: PwC estimates with income elasticities in a range of 1.1-1.3

  15. What drives NHS spending growth in our main scenario? • Total projected increase by 2054/55: +4.1% of GDP • of which: • Catch up effect by 2012/13: +1.1% of GDP • Ageing effect after health adjustment: +1.3% of GDP • Income elasticity/other effects: +1.7% of GDP

  16. Alternative PwC composite scenarios for total NHS spending % of GDP Source: PwC projections starting from HM Treasury estimate for 2004/5

  17. Alternative PwC scenarios for total NHS spending vs Treasury projections % of GDP Source: PwC projections starting from HM Treasury estimate for 2004/5

  18. Summary and key issues • PwC and Treasury projections similar apart from NHS spending • explained by our inclusion of non-demographic cost pressures But: both sets of projections see rise in total public spending to around 45-47% of GDP by 2054/55 (c.42% at present) Higher longevity might increase this; higher employment rates or healthier lifestyles might reduce the pressure on future taxpayers Raises issues as to: • Potential pressure on NHS model if unit costs rise in line with historic trends: how can these cost pressures be mitigated? • Are there other major areas of public spending that can be reduced as a share of GDP? • Balance between private and public spending?

More Related