When we are ignorant about the future, sometimes we should just accept it rather than speculate about what might happen next. We do not know how the election of Donald Trump as US president will affect the UK economy. His economic policies — fiscal stimulus and trade barriers — are unclear and contradictory. Even if we knew their details, we would still be uncertain of their effects.
When you don’t know the shock and are unconvinced about your model, any predictions you make will be right by chance alone. At times like this we should stick to what we know.
For the next four years, UK economic policy will still be clearing up the mess in the public finances from the 2007-09 financial crisis. Regardless of whether that work is close to completion by the time of the next US presidential election in 2020, we will then experience the first bills of a rapidly ageing population falling due. The combination means there will be no respite from our recent challenges in meeting the public’s desire for better standards of living in the 2020s.
There might, of course, be a miraculous surge in the productivity of Britain, enabling much faster growth of output, income and tax revenues without more people and toil. Fairies might also wave a giant magic wand, but we would be wise to rely on neither.
Unlike the next president’s policies, the economics of ageing is simple to track. Britain’s birth rate grew rapidly between 1955 and its peak in 1964, so the flows of people reaching the state pension age, 66 from 2020, will intensify through the next decade. Add to this the fact that average per capita spending on healthcare increases rapidly after people reach 65, and the pressures on the public purse become obvious.
The Office for Budget Responsibility is set to publish more gloomy projections of longer-term public spending costs early next year, but even its most recent figures still show health, long-term care and state pension costs adding 1.8 per cent of national income to public spending between 2020 and 2030. To pay for that would require the doubling of revenues from all capital taxes — inheritance tax, capital gains tax and stamp duties.
Even using the OBR’s extremely optimistic assumptions that the underlying size of the UK economy will grow 4.8 per cent a year in the 2020s — generating optimistic income tax revenue forecasts — ageing leads to a larger deficit: a worsening of the budget deficit by 1.5 per cent of national income during the next decade. Taxes will rise without anyone feeling the state has become more generous and before any government can use the power of taxation and public spending to help people “left behind” and “just about managing”. They will not be at the front of the queue for government help because there will be the bills of pensioner baby boomers to pay.
Both by luck and by sheer weight of numbers, the baby-boomer generation is the lucky one. It is set to receive at least 15 per cent more public spending over their lifetimes than they pay in tax. Subsequent generations, particularly those born after the 1970s, will pick up the tab, paying in significantly more than they receive.
Surveys show baby boomers are not heartless money-grabbers. They care about their children and grandchildren’s plight. But they have also voted this year in favour of greater benefits for themselves, against higher immigration which would help to pay the bills and, in the 2015 election, against building sufficient property to keep housing costs for younger people under better control.
Although we expect Mr Trump’s presidency to offer opportunities and threats to Britain’s prosperity, population ageing is a fact of life. The country will soon have to deal with the bills from a large generation that has always succeeded in getting others to pay.