Economic Affairs Committee
Tuesday 21st July 2026
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15:08
Speaker 1
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Speaker 1
Three. Welcome to the Lord's. Three. Welcome to the Lords Economic Affairs committees. One off session on the publication of the OBR office Budget Responsibilities, Fiscal Risks and Sustainability Report. Um, we recommended in our last report on the fiscal framework that this very important document get more publicity. So we thought we would lead by example, get more publicity by inviting the authors back in um to discuss various elements of it. We're really grateful to the three of you, professor David Miles, a member of the Budget Responsibility Committee of the OBR.
Tom Josephs, also a member of the Budget Responsibility Committee, and Laura Gardner, chief of staff at the OBR. Um, we are screening this live on Parliament live TV and a full transcript will be taken. And we'll circulate that to you so that you can make any factual corrections afterwards. So thank you again for your time. We're very, very grateful. Can I start with a general question on spending. Reform of spending. Um which is in which spending areas and obviously there are large substantial areas of national health service pensions, social care, etc.
which spending areas, um, would you highlight where reform could have the most pronounced effect on the long term trajectory of spending and on public finances?And another way of putting this question, I guess, is which areas poses the greatest risks?Which areas do you have most concerns about in the medium to long term trajectory?Um, and where the government has more credible control over the levers of controlling that spending?David, let's start with you or. Thank you.
Tom Josephs, also a member of the Budget Responsibility Committee, and Laura Gardner, chief of staff at the OBR. Um, we are screening this live on Parliament live TV and a full transcript will be taken. And we'll circulate that to you so that you can make any factual corrections afterwards. So thank you again for your time. We're very, very grateful. Can I start with a general question on spending. Reform of spending. Um which is in which spending areas and obviously there are large substantial areas of national health service pensions, social care, etc.
which spending areas, um, would you highlight where reform could have the most pronounced effect on the long term trajectory of spending and on public finances?And another way of putting this question, I guess, is which areas poses the greatest risks?Which areas do you have most concerns about in the medium to long term trajectory?Um, and where the government has more credible control over the levers of controlling that spending?David, let's start with you or. Thank you.
15:10
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15:10
Speaker 2
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Speaker 2
Thank you. Yes. And and thank you for giving us the opportunity to do something you were keen that we do do, which is help publicise the Fiscal Risks and Sustainability report. And we're very grateful that you found time to see us quite soon after we publish it. I think if I ask a related question, which is where are the spending pressures that we've identified that generate the the largest increase in overall spending over the next few decades?And it's probably no surprise to say that they are in the areas of health and pensions or welfare support for the elderly, which account between them in roughly equal measure for the whole pretty much the whole of the projected increase of about ten percentage points in GDP on government spending.
That's on an assumption of what we call an changed policies and unchanged policies. On the tax side tend to generate depends a bit on which scenario you look at, but tend to generate a profile for tax revenues, which is relatively flat. So this opens up a large gap. The further ahead you look and really is behind the trajectories for debt to GDP, which on pretty much all of the scenarios, some more optimistic than others on productivity, on labour market outcomes and such. But pretty much all of them generate trajectories which ultimately are unsustainable.
And on every increase in profile. So perhaps it's in the area of pensions and and health, where one, one might argue one needs to do most, neither of which are easy. We on the pension side calculate. Costly sticking over the course of the next several decades to. The triple lock is. And it is um. Difficult and rising in terms of the difference between spending on pensions under the triple lock. And if you tie state pensions to earnings to our average earnings.
I think I'm right in saying my colleagues will correct me that a few decades from now. It adds about one and a half, sometimes even nearer to two at a 50 year horizon to government spending. And I can appreciate that over over several decades, 2% on government spending every year for several decades is is a non-trivial part of the very big increase in debt to GDP. We get. I think on the health side, it's a bit more difficult to identify a specific policy, which you can cause a particular savings.
What we do do is show that if if the increase in health costs relative to other costs in the economy, which we think has been running, uh, at a quite substantial level for some decades, partly because productivity in a very service heavy sector of the economy, like health, tends to fall behind productivity in the economy in general. But if potentially as a result of AI, that could be turned around and that productivity in the health sector would at least to match that in the rest of the economy. Um, that's another area where you would over decades generate really, really quite substantial savings.
But I don't know. Tom. Um, Laura, whether you want to elaborate on any of.
That's on an assumption of what we call an changed policies and unchanged policies. On the tax side tend to generate depends a bit on which scenario you look at, but tend to generate a profile for tax revenues, which is relatively flat. So this opens up a large gap. The further ahead you look and really is behind the trajectories for debt to GDP, which on pretty much all of the scenarios, some more optimistic than others on productivity, on labour market outcomes and such. But pretty much all of them generate trajectories which ultimately are unsustainable.
And on every increase in profile. So perhaps it's in the area of pensions and and health, where one, one might argue one needs to do most, neither of which are easy. We on the pension side calculate. Costly sticking over the course of the next several decades to. The triple lock is. And it is um. Difficult and rising in terms of the difference between spending on pensions under the triple lock. And if you tie state pensions to earnings to our average earnings.
I think I'm right in saying my colleagues will correct me that a few decades from now. It adds about one and a half, sometimes even nearer to two at a 50 year horizon to government spending. And I can appreciate that over over several decades, 2% on government spending every year for several decades is is a non-trivial part of the very big increase in debt to GDP. We get. I think on the health side, it's a bit more difficult to identify a specific policy, which you can cause a particular savings.
What we do do is show that if if the increase in health costs relative to other costs in the economy, which we think has been running, uh, at a quite substantial level for some decades, partly because productivity in a very service heavy sector of the economy, like health, tends to fall behind productivity in the economy in general. But if potentially as a result of AI, that could be turned around and that productivity in the health sector would at least to match that in the rest of the economy. Um, that's another area where you would over decades generate really, really quite substantial savings.
But I don't know. Tom. Um, Laura, whether you want to elaborate on any of.
15:13
Speaker 3
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Speaker 3
That, I mean, I well, first of all, to echo David's thanks to the committee for the opportunity to talk about the report. And thank you for highlighting it in your in your report. And I think we agree that we see it as one of the most important reports that we do. And we've been looking more widely for ways in which we can, um, try and raise its profile and promote it. Um, I just maybe one thing to add to David's overview is in addition to health and pensions and the increase and the pressure on those from demographics and this wider cost pressure on health, I guess the new pressure on spending that we've identified this time is, is defense.
And so we assume in our projections that the government meets its commitment to get to 3.5% of GDP by 2035. And that is just quite a significant new pressure on top of those ones, which, you know, we've sort of known about for, for a while. And contribute to, you know, a quite material, um, increase in the, in the pressure upward trajectory of debt in the projections. And of course, there's quite a lot of risk around that number 3.5% GDP is, is the NATO target.
But, you know, unfortunately, there are clearly scenarios where you could envisage defence spending, um, needing to increase more than that. So yeah, I guess that's, that's a sort of new pressure that we've identified in this, in this report.
And so we assume in our projections that the government meets its commitment to get to 3.5% of GDP by 2035. And that is just quite a significant new pressure on top of those ones, which, you know, we've sort of known about for, for a while. And contribute to, you know, a quite material, um, increase in the, in the pressure upward trajectory of debt in the projections. And of course, there's quite a lot of risk around that number 3.5% GDP is, is the NATO target.
But, you know, unfortunately, there are clearly scenarios where you could envisage defence spending, um, needing to increase more than that. So yeah, I guess that's, that's a sort of new pressure that we've identified in this, in this report.
15:14
Speaker 1
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Speaker 1
Can I ask, I guess I'm interested in the relationship between spending um growth. And debt. And I guess one way of thinking about this is what if spending trajectories are, as you envisage over the next few years. Um, and not change what, what rates of growth will be needed in order for the debt ratio to remain stable over the long term?Do you have a sense of a ballpark figure in that?
15:15
Speaker 2
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Speaker 2
We show one scenario in which productivity growth is substantially higher. I mean, not just higher than it has been over the last 15, 20 years when it's been dismally low, barely half a percent productivity growth. But even higher than it was in the couple of decades leading up to the financial crisis. So we show a scenario in which productivity growth is pretty close to 2%. That's not quite enough to holding everything else constant. Keep the debt GDP ratio flat.
But it's it's a lot less steep than under what we call sometimes our base scenario or central scenario, where productivity growth is about 1.4% as opposed to closer to 2%. So it would need, I suppose that calculation tells you you need something probably a bit above 2% for productivity growth. To hold the debt GDP ratio about where it is now, just under 100%, 2.2 um. That's probably about the number would be, I think roughly the average between the end of the Second World War and the turn of the turn of the century.
So it's not exceptionally British history, but it is very dramatically higher than we've had at any point in the last 20 years. Right. I think.
But it's it's a lot less steep than under what we call sometimes our base scenario or central scenario, where productivity growth is about 1.4% as opposed to closer to 2%. So it would need, I suppose that calculation tells you you need something probably a bit above 2% for productivity growth. To hold the debt GDP ratio about where it is now, just under 100%, 2.2 um. That's probably about the number would be, I think roughly the average between the end of the Second World War and the turn of the turn of the century.
So it's not exceptionally British history, but it is very dramatically higher than we've had at any point in the last 20 years. Right. I think.
15:17
Speaker 4
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Speaker 4
There's just one thing to add to that scenario. David was explaining which, um, uh, if you were to achieve those kind of rates of productivity growth, there's a big question which we explore in alternate scenarios about, um, whether governments choose to, um, invest. Essentially invest the proceeds of that growth in, uh, in improving public services or, or bank them to kind of hold debt down, um, it is the case, the scenario David described is, is true. If spending doesn't rise as a share of GDP to match the growth in GDP, that that productivity delivers in the period David was describing in the second half of the 20th century, for the most part, spending on public services did increase to match the growth.
The relatively healthy growth in GDP spending to GDP stayed absolutely constant, stayed roughly constant. So we show a scenario where you get that higher productivity growth. But the the primary spending rises with the GDP growth. And then debt is not very different from the baseline scenario at all. So productivity growth is great and would make everything easier. But there are still choices for governments in terms of where the proceeds of that growth goes, whether it's into whether it is into kind of public services or, or, or holding down debt.
The relatively healthy growth in GDP spending to GDP stayed absolutely constant, stayed roughly constant. So we show a scenario where you get that higher productivity growth. But the the primary spending rises with the GDP growth. And then debt is not very different from the baseline scenario at all. So productivity growth is great and would make everything easier. But there are still choices for governments in terms of where the proceeds of that growth goes, whether it's into whether it is into kind of public services or, or, or holding down debt.
15:18
Speaker 1
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Speaker 1
Absolutely. Understood. But just just to recap, though, on what the three of you have said. So in very crude terms, um, your assumption is a long term productivity rate of 1.4% in order for debt, broadly speaking, to be stable ish. Um, productivity would have. To be 50% above that at one, 2.1, 2.2%. Yeah. Right.
15:19
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15:20
15:20
Speaker 6
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Speaker 6
It's just when you're referring to health and pensions on the health service, it's very difficult to define productivity. There's um say if the if there is a shortage of nurses, 30,000 which has been talked about if you fill those jobs, productivity goes down and you provides a better service. So the. It's and. If you're looking at the future costs, if the National Care Service is developed, that will be very expensive and that will be developed as part of the health service or linked to it could be the.
Um, so you could find us um, increasing pressures on that health spending.
Um, so you could find us um, increasing pressures on that health spending.
15:20
Speaker 4
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Speaker 4
I think it's a very good point. So sort of two points there. One is that you're absolutely right that, um, defining productivity in the health sector and in public services more generally is extremely difficult, um, there are kind of assumptions for these long term projections are based on a kind of range of. National evidence and studies that show that um, it has tended to be the case that um, labour intensive public service sectors like health, um, can, can lag some of the productivity gains in other sectors where there's kind of more potential for implementation of technological advancements and things like that.
But in the long run, the wages have to keep up with those in the private sector. And that's the kind of core point of where these things we call other cost pressures in health come from. In relation to care, a national care service is a, is a good one. So we model both health and social care, but we do so a bit differently. And one of the things that's a bit different is we have this kind of um increasing. Other non demographic cost pressures, assumptions in health.
We don't have that to the same extent in our social care spending projections. And that is reflective of things like, uh, the system of restricting eligibility for care means testing via local authorities, having been a mechanism that can kind of hold down costs to a greater extent than in health. But I think there's definitely, um, lots of. Overlap between spending on health and spending on social care in the long run. So it is possible that a different model of delivery or provision for care might put upward pressure on our projections for care spending, but that might take a bit of pressure off our projections for health spending.
So we've kind of thought about them in parallel. And it may be that some of the things we're calling other cost pressures in health may actually emerge in the care bit rather than the health bit, which is where we've put them all.
But in the long run, the wages have to keep up with those in the private sector. And that's the kind of core point of where these things we call other cost pressures in health come from. In relation to care, a national care service is a, is a good one. So we model both health and social care, but we do so a bit differently. And one of the things that's a bit different is we have this kind of um increasing. Other non demographic cost pressures, assumptions in health.
We don't have that to the same extent in our social care spending projections. And that is reflective of things like, uh, the system of restricting eligibility for care means testing via local authorities, having been a mechanism that can kind of hold down costs to a greater extent than in health. But I think there's definitely, um, lots of. Overlap between spending on health and spending on social care in the long run. So it is possible that a different model of delivery or provision for care might put upward pressure on our projections for care spending, but that might take a bit of pressure off our projections for health spending.
So we've kind of thought about them in parallel. And it may be that some of the things we're calling other cost pressures in health may actually emerge in the care bit rather than the health bit, which is where we've put them all.
15:22
15:22
15:22
Speaker 4
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Speaker 4
That's a very good question. So um we actually showed both in the report. So there's a chart which shows um state pension spending under the triple lock, uh earnings and CPI uprating inflation, uprating. Um and so the gap between the first two, the triple lock and earnings, which as David said, is, um, by the 2070s, close to 2% of GDP of spending reflects, um, the historical volatility of inflation and earnings, which allows us to estimate essentially the years in which the non earnings bit of the lock bite over 50 years, um, if you go down to inflation uprating that, that saves you relative to the triple lock a much bigger, I think 5.5% of GDP.
A common theme across probably every answer will give you is that there's a huge amount of uncertainty in all the assumptions we make on policy. And that's why we show lots of different scenarios. So we've shown all three, um, across. State pension spending, non-state pension, welfare spending, and actually areas of tax threshold uprating, which we might get into later. Um, we have tended to make as the assumption in our baseline scenario, um, obviously the triple lock in the state pension, but in other areas earnings uprating as our default assumption, uh, which as you point out, is a little bit different to some of the kind of default policy commitments in the medium term.
We do that for a range of reasons, but essentially, um, with. With our kind of economic assumptions for inflation and earnings over 50 years, the shape of welfare spending, um, if you assume CPI uprating would be the value in um, in relation to the economy of benefits being reduced by more than half on the tax side, if tax thresholds go up by inflation for 50 years, under our economic assumptions you'd have um, I think like over two thirds of workers, including minimum wage earners, paying the higher rate of tax, so our baseline assessment is that that is quite a weird way to interpret unchanged policy.
But we recognise it's a very finely judged choice in our assumptions. So we show both. Um so. I think I think coming back to the state pension in the triple lock, uh earnings up. Rating might, might be considered the most neutral alternative assumption to having the kind of ratchet effect of the triple lock that we have, uh, holding the. Value of the state pension constant in relation to earnings in the economy over a 50 year period. And that is consistent with our long term assumptions on other bits of welfare and tax threshold uprating.
But we recognise that there's a very valid case to make for inflation. Uprating as another alternative, given that that is in medium term policy settings. And so we show that too, as well as discussing its implications for, you know, economic incentives to work on the tax side, poverty on the welfare side, which is what which is what you'd effectively get if you have a kind of 50 year wedge between the rate at which benefits are growing, state pension working age and the rate at which wages are growing.
Thanks.
A common theme across probably every answer will give you is that there's a huge amount of uncertainty in all the assumptions we make on policy. And that's why we show lots of different scenarios. So we've shown all three, um, across. State pension spending, non-state pension, welfare spending, and actually areas of tax threshold uprating, which we might get into later. Um, we have tended to make as the assumption in our baseline scenario, um, obviously the triple lock in the state pension, but in other areas earnings uprating as our default assumption, uh, which as you point out, is a little bit different to some of the kind of default policy commitments in the medium term.
We do that for a range of reasons, but essentially, um, with. With our kind of economic assumptions for inflation and earnings over 50 years, the shape of welfare spending, um, if you assume CPI uprating would be the value in um, in relation to the economy of benefits being reduced by more than half on the tax side, if tax thresholds go up by inflation for 50 years, under our economic assumptions you'd have um, I think like over two thirds of workers, including minimum wage earners, paying the higher rate of tax, so our baseline assessment is that that is quite a weird way to interpret unchanged policy.
But we recognise it's a very finely judged choice in our assumptions. So we show both. Um so. I think I think coming back to the state pension in the triple lock, uh earnings up. Rating might, might be considered the most neutral alternative assumption to having the kind of ratchet effect of the triple lock that we have, uh, holding the. Value of the state pension constant in relation to earnings in the economy over a 50 year period. And that is consistent with our long term assumptions on other bits of welfare and tax threshold uprating.
But we recognise that there's a very valid case to make for inflation. Uprating as another alternative, given that that is in medium term policy settings. And so we show that too, as well as discussing its implications for, you know, economic incentives to work on the tax side, poverty on the welfare side, which is what which is what you'd effectively get if you have a kind of 50 year wedge between the rate at which benefits are growing, state pension working age and the rate at which wages are growing.
Thanks.
15:25
Speaker 1
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Speaker 1
We have to make some progress. That was a long first question, which is my fault because I asked all the follow ups, I apologize, I should say we may have a vote in the next half hour, or maybe in about half an hour. So if so, we'll suspend for ten minutes and come back to apologise in advance if that happens, uh, Lord young.
15:26
Speaker 8
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Speaker 8
Can we move on to the section of the report that deals with fiscal sustainability?You make the point in the first part of the report that if we carry on as we are, that eventually becomes unsustainable. And you have a guess that the sort of adjustment that would be needed to get things into balance, which is the equivalent of the education budget. And you also make the point that the later we take fiscal tightening, the more difficult it becomes. Can we just get deal with?One related issue?Is there no scope at all for reducing any of the taxes we have, which in turn might promote growth?Should we discard that?Are there certain taxes which, if they were lowered, might generate growth?
15:27
Speaker 2
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Speaker 2
I think it's certainly conceivable. There are some features of the UK tax system which generate particularly high marginal tax rates for people earning in particular bands, for example, which it's pretty likely are a major disincentive either to work or to save. And they have some damaging features on, on, on the wider economy and potential output and wealth in the country. So there may be ways of getting rid of some of the most egregious damages to incentives that some parts of the tax system generate, and that if you did that, it would more than pay for itself in terms of a minimal loss in revenue, but a substantial positive impact on incentives to work and save.
It wasn't our focus in the report. Um, but but that's not to say we don't think that's impossible. And our strategy really here was to say, well, take take the system as it is unchanged. And how might that play out?And the message really is, well, it doesn't play out very well. You need to make some changes somewhere down the road. So I wouldn't want to suggest that just because there needs to be a tightening in fiscal policy and closing the gap between tax revenue and spending that necessarily precludes cutting some taxes, which which would be the ones, if you can identify them, that do the most damage relative to the revenue they bring in.
It wasn't our focus in the report. Um, but but that's not to say we don't think that's impossible. And our strategy really here was to say, well, take take the system as it is unchanged. And how might that play out?And the message really is, well, it doesn't play out very well. You need to make some changes somewhere down the road. So I wouldn't want to suggest that just because there needs to be a tightening in fiscal policy and closing the gap between tax revenue and spending that necessarily precludes cutting some taxes, which which would be the ones, if you can identify them, that do the most damage relative to the revenue they bring in.
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Speaker 2
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Speaker 2
The that's the kind of very. High marginal tax rate that does the most damage to incentives. And I think it's it's at that that point in the earnings distribution, I think there are some points at the lower end of the earnings distribution where it really is is coming from the withdrawal of of benefits which generate very high tax rates. There. Um.
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Speaker 2
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Speaker 2
Uh, it's, I mean, how, how they've done it, I guess the primary way is, and this goes back to previous governments, it's been, it's been the policy for some years now, and it's set to run a bit longer. So it'll turn into a decade, which is freezing the the thresholds for income tax, which I think I'm right in saying. But Tom will correct me, um, has has been behind most much of the increase by far the biggest single measure in the increase in the tax take out GDP.
Which is what's going to on our projections anyway on the central forecast probably mean that the years of increasing debt to GDP at least stop in within the next few years and we level off for a while. Were there other ways of doing it or. Most certainly. Um, there were I don't I don't think in a way that there's an obvious open goal that's been missed in that if you're going to do it primarily through trying to raise taxes relative to GDP, it's it's pretty hard to think of a painless way of doing it that will, in the short term, bring in a lot of tax revenue.
But do you want to. Well.
Which is what's going to on our projections anyway on the central forecast probably mean that the years of increasing debt to GDP at least stop in within the next few years and we level off for a while. Were there other ways of doing it or. Most certainly. Um, there were I don't I don't think in a way that there's an obvious open goal that's been missed in that if you're going to do it primarily through trying to raise taxes relative to GDP, it's it's pretty hard to think of a painless way of doing it that will, in the short term, bring in a lot of tax revenue.
But do you want to. Well.
15:30
Speaker 3
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Speaker 3
Just one thing to add is, um, I mean, it is actually the case since the end of Covid that governments have had in place plans to consolidate the public finances. But those plans have not actually been delivered. So we've not actually, over the period since Covid, have seen a fiscal consolidation being implemented in the sense that borrowing has been stuck at around 5% of GDP for the past 4 or 5 years. Uh, governments in each of those years have had plans to reduce borrowing over the subsequent five years to around 2% GDP, which is sort of roughly the rate you need to get debt stable and therefore kind of have the public finances on a reasonable, sustainable, reasonably sustainable path.
But as I say that that has not actually been delivered. And I think one, um, important. Result in the report is that the long term pressures that we identify in our baseline scenario, if governments don't do anything about them, then they start to push debt onto a clearly unsustainable upward trajectory in the in the 2040s. But the starting point for that projection is an assumption that the current consolidation plan is achieved. If it's not achieved and you start these long term pressures hitting from the level of deficit where it currently is, then that upward trajectory in debt starts much sooner in the 2030s.
So sort of underlines the importance in terms of fiscal sustainability, of actually delivering the current medium term fiscal consolidation plan.
But as I say that that has not actually been delivered. And I think one, um, important. Result in the report is that the long term pressures that we identify in our baseline scenario, if governments don't do anything about them, then they start to push debt onto a clearly unsustainable upward trajectory in the in the 2040s. But the starting point for that projection is an assumption that the current consolidation plan is achieved. If it's not achieved and you start these long term pressures hitting from the level of deficit where it currently is, then that upward trajectory in debt starts much sooner in the 2030s.
So sort of underlines the importance in terms of fiscal sustainability, of actually delivering the current medium term fiscal consolidation plan.
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Speaker 9
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Speaker 9
I'd like to explore, if I could, a little bit about whether there might be different outcomes, even without major policy changes, you know, what, what do you regard as being the kind of error margins around some of these numbers, particularly as one is looking so far ahead?Uh, reading the report, it seems to me that what you're highlighting very much has been the, the demographic situation and that most of the pressures are coming are through the health service, social care and pensions. Now, the demographic factors that are.
Pushing this are now largely baked in. I mean, we have a very good idea, do we not, of what's going to happen to the number of elderly people?Um, I mean, it'll be 25 years before the birth rate can make any difference to the number of people who are in the labour supply. Therefore, it seems to me that it is actually quite difficult to avoid the conclusions that you reach about the pressures upon health care. Now, you say maybe there can be some great breakthrough with regard to health care.
Uh, but the underlying pressures that are putting forward this hypothesis that the underlying pressures that you are talking about are not likely to be such for the next 30 years or so, are not likely to be very far removed from what it is that you have presented. Or do you think there is much larger scope for error in reaching those conclusions?
Pushing this are now largely baked in. I mean, we have a very good idea, do we not, of what's going to happen to the number of elderly people?Um, I mean, it'll be 25 years before the birth rate can make any difference to the number of people who are in the labour supply. Therefore, it seems to me that it is actually quite difficult to avoid the conclusions that you reach about the pressures upon health care. Now, you say maybe there can be some great breakthrough with regard to health care.
Uh, but the underlying pressures that are putting forward this hypothesis that the underlying pressures that you are talking about are not likely to be such for the next 30 years or so, are not likely to be very far removed from what it is that you have presented. Or do you think there is much larger scope for error in reaching those conclusions?
15:33
Speaker 2
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Speaker 2
I think you're right. The the demographics are are quite predictable and reliable in a sense over the decades in terms of how many people are going to reach the points in their lives when they use the health service much more intensively. And it's very hard to imagine. That playing out much, much differently. I mean, in a way, it might come back to cost pressures, and who knows quite how they'll play out in the health system. Um, it may be that there are um, productivity improvements, ways of doing things more effectively, treating, treating patients at lower cost, which turns out to be very helpful.
To the extent that that does depend on technological things, they may be something that you hope happens, but there's not much a government can necessarily do about them. It's just they either come along and you can use them or they don't. So I think the health pressures are are predictable and quite difficult to avoid unless one gets lucky on the technological front.
To the extent that that does depend on technological things, they may be something that you hope happens, but there's not much a government can necessarily do about them. It's just they either come along and you can use them or they don't. So I think the health pressures are are predictable and quite difficult to avoid unless one gets lucky on the technological front.
15:34
Speaker 4
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Speaker 4
I think there's just one thing to add to that on the health side, which so we've talked a little bit about the scenarios we show where, um, we've talked a little about this assumption that as well as demographics, what's driving health spending is growing non demographic cost pressures. Um, and um, one way they could be, we show a scenario where those, those other cost pressures don't exist. And I think in that one, health spending just rises very modestly to 9% of GDP by the 2070s, rather than 13%.
That's four percentage points is a big gap. That could be kind of technological breakthroughs that have transformative impacts on health, as we've discussed. It could also be more driven by policy choices to persistently contain those costs in a way that hasn't happened in the past. That would be certainly challenging. But, you know, there's different health systems in other countries that manage that. And, um, the balance between public and private spending is different, but the other, as well as the number of people in the population, which, as you say, and their age, which as you say, there are some good projections of and seem certain are going in one direction.
There's also the health of the population. And so we do show some scenarios. For example, around. Kind of the years of life spent in good health and show that we do this, especially because there's been quite a lot of data on healthy life expectancy in recent years. It's quite contested. It's very difficult to measure. Um, but we show that, for example, in a, in a higher healthy life expectancy scenario where we went back to kind of an old model where healthy life expectancy tracked overall life expectancy, which hasn't doesn't appear to have been the case recently.
You could save another 2% of GDP in health spending just by the population. You do have at the ages. They are being a fair chunk healthier than in our baseline scenario, and that is uncertain. And that could come about because of, you know, efforts of policy or just because of other factors. Um, you know, kind of revolutions in drugs around the world and, and other things. So I agree with your general point, but there's enough uncertainty in kind of both what could hold down other cost pressures and how underlying health trends could contribute to health spending and.
That's four percentage points is a big gap. That could be kind of technological breakthroughs that have transformative impacts on health, as we've discussed. It could also be more driven by policy choices to persistently contain those costs in a way that hasn't happened in the past. That would be certainly challenging. But, you know, there's different health systems in other countries that manage that. And, um, the balance between public and private spending is different, but the other, as well as the number of people in the population, which, as you say, and their age, which as you say, there are some good projections of and seem certain are going in one direction.
There's also the health of the population. And so we do show some scenarios. For example, around. Kind of the years of life spent in good health and show that we do this, especially because there's been quite a lot of data on healthy life expectancy in recent years. It's quite contested. It's very difficult to measure. Um, but we show that, for example, in a, in a higher healthy life expectancy scenario where we went back to kind of an old model where healthy life expectancy tracked overall life expectancy, which hasn't doesn't appear to have been the case recently.
You could save another 2% of GDP in health spending just by the population. You do have at the ages. They are being a fair chunk healthier than in our baseline scenario, and that is uncertain. And that could come about because of, you know, efforts of policy or just because of other factors. Um, you know, kind of revolutions in drugs around the world and, and other things. So I agree with your general point, but there's enough uncertainty in kind of both what could hold down other cost pressures and how underlying health trends could contribute to health spending and.
15:37
Speaker 9
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Speaker 9
The state pension numbers must be, to a large extent, fairly mechanical calculation. I mean, this must also, without some massive change or significant change in. Uh, in the ages of which people die, in a sense, we know the number of pensioners that are going to be coming through. And we know the difference between, uh, the triple lock. Yeah, it's earnings related or whether it's, uh, price.
15:37
Speaker 4
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Speaker 4
Although even on that, and sorry to just say everything's uncertain, but you know what, what do you expect from us?Um, um, the. The triple lock, as you know, has this kind of slightly random ratchet effect. So even on that estimating the extent to which the ratchet effect, um, has. Happens and drives a wedge between what would happen with your earnings growth is quite uncertain. So in last year's report we looked at what if we assumed the triple lock ratchet effect followed a more volatile period for inflation and earnings the period since 2010, rather than measuring it over the whole period since 1990, which we did in the baseline.
I think that adds that would add another one and a half, close to 2% of GDP again. So even there, like quite how much the triple lock forces things up relative to earnings is pretty uncertain.
I think that adds that would add another one and a half, close to 2% of GDP again. So even there, like quite how much the triple lock forces things up relative to earnings is pretty uncertain.
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15:39
Speaker 2
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Speaker 2
I think Courtney. Immigration. Um, I mean, what we've done is take the latest Office of National Statistics Central projection. Uh, which is really, I don't think much more than them taking the average levels of net immigration over some past period, maybe, maybe 10 or 15 years and saying, well, that's, that's the new norm in the future. So their number is 230,000 a year, which would be simultaneously a lot less than it has been in recent years, but a lot more than it's been.
If you look back over the last 40 or 50 years, it's very, very high, a very high level. So that's that's what we do. And in a. Way, that's more under the control of the government than almost anything else we've been talking about. So, so far, I think. The fiscal impacts, even even if you could pull a lever and change the number of people arriving in the country, I mean, it would still be very unclear quite what the fiscal benefits or costs might be, because it would depend on.
What kind of people actually arrive, what proportion of them are actually going into the workforce, what wages do they earn?At what point do they become eligible for welfare?Do they stay in the country?Ideally, for fiscal purposes, you want people to arrive at 25 and stay for like 20 years and leave while they're still in good health. They haven't drawn on the health service. They've paid tax. They don't get the state pension. Um, they come, they go again before they become fiscally very costly.
Um, but you can't guarantee that. And if, if, if they, if they arrive, if people arrive and then become like the rest of us almost immediately and stay until they die, most of them, um, then although there's a short run fiscal benefit, it's much less obvious as you look further down the road. So. The, the, the impacts of significantly higher or indeed significantly lower net immigration over the long term. My own view, although we don't we don't focus on it too much in this report.
My own view that in the long term it isn't isn't really the answer to the question, how do you how do you how do you become more sustainable.
If you look back over the last 40 or 50 years, it's very, very high, a very high level. So that's that's what we do. And in a. Way, that's more under the control of the government than almost anything else we've been talking about. So, so far, I think. The fiscal impacts, even even if you could pull a lever and change the number of people arriving in the country, I mean, it would still be very unclear quite what the fiscal benefits or costs might be, because it would depend on.
What kind of people actually arrive, what proportion of them are actually going into the workforce, what wages do they earn?At what point do they become eligible for welfare?Do they stay in the country?Ideally, for fiscal purposes, you want people to arrive at 25 and stay for like 20 years and leave while they're still in good health. They haven't drawn on the health service. They've paid tax. They don't get the state pension. Um, they come, they go again before they become fiscally very costly.
Um, but you can't guarantee that. And if, if, if they, if they arrive, if people arrive and then become like the rest of us almost immediately and stay until they die, most of them, um, then although there's a short run fiscal benefit, it's much less obvious as you look further down the road. So. The, the, the impacts of significantly higher or indeed significantly lower net immigration over the long term. My own view, although we don't we don't focus on it too much in this report.
My own view that in the long term it isn't isn't really the answer to the question, how do you how do you how do you become more sustainable.
15:41
Speaker 9
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Speaker 9
And one other area of uncertainty, of course, and this goes the other way, is the point that you make in the report that on average, we've had some kind of crisis once every nine years, which has actually been a shock, which is required some significant budgetary support from the government. Could you say a bit more about how you've modelled that and what the consequences of that are?
15:41
Speaker 3
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Speaker 3
I can do, yes. So, uh, as. In our baseline scenario, we essentially assume smooth, steady economic growth all the way through 50 years. Um, that's clearly, um, very unlikely. And what we've seen over the past three decades is that the economy has been hit by a very major shock roughly around every ten years. So, and that has, as you say, had big fiscal costs, both in terms of the impact it's had on the economy and the cost of government policy support, um, to, to address the shock.
So we have a scenario where we assume instead of that steady growth, that the economy gets hit by a major shock every ten years, roughly. And what that does, unsurprisingly, it means that again, the starting point of the upward trajectory in debt happens more quickly than in the baseline scenario. Uh, because you're, you're sort of pushed on to a unsustainable path by the shock more quickly. And then that the upward path in debt is then is then steeper. You know, if governments were to do nothing about it.
So, uh. And I think, you know, the reality is that is actually a more plausible, if you like, central scenario than, than the one we call the baseline.
So we have a scenario where we assume instead of that steady growth, that the economy gets hit by a major shock every ten years, roughly. And what that does, unsurprisingly, it means that again, the starting point of the upward trajectory in debt happens more quickly than in the baseline scenario. Uh, because you're, you're sort of pushed on to a unsustainable path by the shock more quickly. And then that the upward path in debt is then is then steeper. You know, if governments were to do nothing about it.
So, uh. And I think, you know, the reality is that is actually a more plausible, if you like, central scenario than, than the one we call the baseline.
15:43
15:43
Speaker 10
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Speaker 10
Thank you. Um, we've rather done to death. The issues of the triple lock. And as I understand what you're saying is, if the triple lock is maintained, it's a 9% increase over your during the period of your, um, that you're measuring, um, 7% if you go down to average earnings and 5% if we go down to inflation. Um, first of all, that's, that's correct. I think.
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15:45
Speaker 4
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Speaker 4
The debt to GDP ratio. Yes, yes. Okay. So, um, the one of those, we've sort of fully flowed through to, um, the debt to GDP ratio is the difference between the triple lock and earnings. So the first two, uh, so our base. Line projection has the triple lock in it and has debt rising to around about 300% of GDP by the 2070s. Uh, the alternative where instead of the triple lock you up rate with earnings.
Uh, takes. Uh, I think it's to about 260% of GDP takes kind of close to a fifth of that. Um, so that's a kind of difference of 40% of GDP.
Uh, takes. Uh, I think it's to about 260% of GDP takes kind of close to a fifth of that. Um, so that's a kind of difference of 40% of GDP.
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15:46
Speaker 4
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Speaker 4
I think that goes with the theme across kind of our scenarios that on both the tax and the spending side, across the scenarios, we look at lots of things, get the debt path a bit lower. So I'm getting a bit higher. Um, in almost all of the scenarios we model, debt eventually reaches an unsustainable trajectory over the next 50 years. So we're not we haven't come up with one silver bullet on either the tax.
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15:48
Speaker 11
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Speaker 11
Well, one of the shocks that, uh, um, we may. Be experiencing at the moment and might in a troubled world, uh, come again, um, is an energy shock. And, uh, whether this compels governments to produce some kind of support package, uh, um, uh, and how generous it is, um. Have you thought about this question of how you deal with energy shocks and how you could design, uh, any action by government that would, that would mitigate the long term fiscal damage.
15:48
Speaker 3
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Speaker 3
Okay. Yeah. Thanks. I can take that one. What we haven't done and what is not our role to do is to kind of design policy responses to particular shocks. Our job is to cost the policy responses that government governments, them selves choose to use. So I guess our focus in the face of the current energy shock that we are facing, rather than being thinking about what the policy response will be, is to think about what the impact will be on our next medium term forecast, which we're likely to do.
Um, alongside the next budget. Because the previous forecast that we did in March essentially was done too late to take into account the impacts of, of the energy shock from the start of the conflict in the Middle East. Um, but I mean, in terms of kind of general principles and I mean, I guess the other thing to say is that compared to the 2022 energy price shock, um, the. One so far is much less severe in terms of the increase, especially in gas prices and the energy package that the government announced in 2022 was obviously, designed to deal.
With that much larger increase in gas prices in particular, and was very expensive. But I guess in terms of general kind of principles of policy advice that you would give in response to a temporary shock that, you know, the usual principles in terms of minimising the fiscal costs of that sort of package is to make it kind of temporary. So it deals with the short term shock, but is not a kind of permanent, uh, policy giveaway to make it as targeted as possible in terms of reducing cost for those who are particularly affected and perhaps need the help most, uh, and also to make it timely so that it gets that support to people quickly.
So kind of temporary, targeted, timely is the sort of classic advice for policy responses to this sort of form of shock.
Um, alongside the next budget. Because the previous forecast that we did in March essentially was done too late to take into account the impacts of, of the energy shock from the start of the conflict in the Middle East. Um, but I mean, in terms of kind of general principles and I mean, I guess the other thing to say is that compared to the 2022 energy price shock, um, the. One so far is much less severe in terms of the increase, especially in gas prices and the energy package that the government announced in 2022 was obviously, designed to deal.
With that much larger increase in gas prices in particular, and was very expensive. But I guess in terms of general kind of principles of policy advice that you would give in response to a temporary shock that, you know, the usual principles in terms of minimising the fiscal costs of that sort of package is to make it kind of temporary. So it deals with the short term shock, but is not a kind of permanent, uh, policy giveaway to make it as targeted as possible in terms of reducing cost for those who are particularly affected and perhaps need the help most, uh, and also to make it timely so that it gets that support to people quickly.
So kind of temporary, targeted, timely is the sort of classic advice for policy responses to this sort of form of shock.
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15:50
Speaker 11
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Speaker 11
I wondered if you've done any work on the, um, on. The, the, the policy costs of trying to insulate ourselves from future oil price shocks, in other words, uh, trying to have an energy system, uh, that isn't dependent on the Gulf. Um, uh, and whether, um, uh, I mean, could you, as it were, justify a big capital investment in order to reduce that dependence on the basis that, uh, it will prevent these shocks being such a problem in future for the public finances.
15:50
Speaker 3
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Speaker 3
Yeah. Well, so that that is not something that I think we have specifically tried to model. So I think you're suggesting is, is a sort of investment in, in kind of renewable energy in order to move away from dependence on fossil fuels and nuclear. Yeah. Um, so I don't think that we have, we have tried to model that, that, that specific trade off. Um, I guess, you know, what we have done in our reports is to look at the cost overall of the transition to net zero on the basis of the, you know, the government's current timing for that, i.e., i.e.
the net zero commitment for 2050 and on the basis of the climate Change Committee's baseline path for a transition to net net zero over that period. And what kind of policy action would be needed to deliver that, which obviously does include, uh, transitioning away from fossil fuels. And what we find there is that there is quite a material fiscal cost to that. Um, I think of around 20% of GDP over over 50 years. Most of it actually comes from the loss of emissions related tax revenue, in particular, fuel duty.
And the cost of the kind of public investment the government would need in order to support that transition is, is actually quite a lot lower. I think we roughly have around £10 billion a year in today's terms of extra investment in things like the energy transition, but also in things like, uh, transport systems. Um, a big chunk of the cost is switching homes over to heat pumps and that kind of thing.
the net zero commitment for 2050 and on the basis of the climate Change Committee's baseline path for a transition to net net zero over that period. And what kind of policy action would be needed to deliver that, which obviously does include, uh, transitioning away from fossil fuels. And what we find there is that there is quite a material fiscal cost to that. Um, I think of around 20% of GDP over over 50 years. Most of it actually comes from the loss of emissions related tax revenue, in particular, fuel duty.
And the cost of the kind of public investment the government would need in order to support that transition is, is actually quite a lot lower. I think we roughly have around £10 billion a year in today's terms of extra investment in things like the energy transition, but also in things like, uh, transport systems. Um, a big chunk of the cost is switching homes over to heat pumps and that kind of thing.
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15:52
Speaker 5
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Speaker 5
Thank you. Chair. Um, we've spent quite a lot of time discussing the costs of an ageing population, uh, both in terms of demographic factors, pensions. Health. Uh, excuse me. Because people are living longer, obviously, as you said, but they're also more liable to suffer from chronic diseases that are more costly. And I think one other thing which I'm not sure was mentioned was human ingenuity, because people are constantly inventing, um. Technological solutions for health problems and pharmaceutical solutions that were hitherto unknown and therefore certain diseases were regarded as just something you had to accept.
Can I switch around and ask about age and revenue raising?Uh, rather than just the cost side of it?To some extent, it follows on from questions that Lord Burns were asking. What changes, if any, do you think, to the UK's tax base?Would be most suitable and beneficial in the. The context of an ageing society. If your aim is to promote a more sustainable fiscal backdrop.
Can I switch around and ask about age and revenue raising?Uh, rather than just the cost side of it?To some extent, it follows on from questions that Lord Burns were asking. What changes, if any, do you think, to the UK's tax base?Would be most suitable and beneficial in the. The context of an ageing society. If your aim is to promote a more sustainable fiscal backdrop.
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15:53
Speaker 2
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Speaker 2
Something that would help greatly. And it's not necessarily a fiscal measure, but but it things may play out this way. And I'm sort of quite optimistic about this. Is that a world in which people expect and it's the world we've been in for some time. But it may be that the future will look different from this. A world in which people are living longer. But think that they can expect to retire in their 50s or early 60s is one which may change.
And in many ways, I think it would be beneficial on many different fronts. Firstly, people are clearly living longer than they were 20, 30, 40, 50 years ago. Um, and yet and yet are retiring on, on average at about the same age as they did in the past. And that may change and it may change as a result. Both of people realising they actually feel okay and work is less physically demanding certainly than it was 50 or 60 years ago, and probably less physically demanding than it was even 30 years ago.
And that may have still quite a long way to go, which would mean that people are able and, and on the whole, willing to work a bit longer. Employers might find that they can no longer take a view which may have been prevalent in the past, that they don't really want to offer a new job to somebody in their 50s or 60s, because there's lots of people in their 20s and 30s and 40s who are willing to work well if the demographics change the relative, as it almost certainly will in the UK, change the relative numbers of people in their 20s and 30s and 40s two people in their 60s, 70s and 80s.
Employers might just naturally, in their own economic, economic self-interest, be more consciously trying to hire more people at older age than they did in the past, and maybe to induce them to work. They offer more flexible work and part time work, and that this plays out to everybody's advantage in many ways, and certainly has fiscal benefits as well. I mean, one of the reasons why on our projections, as the proportion of the population in the 70s and 80s rises, it generates some fiscal pressures. Is that on the whole, at the moment, people in those parts of their life aren't paying an awful lot of income tax.
And that may be different down the road. And if it is, then it may be very it may be one of the most fiscally advantageous things. None of that's in in our projections, but we don't take account of those possibilities. Um, so I'm personally quite optimistic about that. I'm also optimistic about the other thing that you mentioned, which is, I mean, it's a form of technological progress. It's finding drugs that hopefully are not terribly expensive, don't have bad side effects, but are actually very effective.
Maybe if you start taking them at a younger age as protection against some of the, some of the big killers today, cardiac conditions, cancers, dementia. Um, I've heard medical people and people in the pharmaceutical industry. Um, wax lyrical on the benefits of statins, which is pretty well known, but other drugs which. People are discovering are, were never designed as protection against dementia or cardiac conditions, but seem to be very effective against those conditions. And then I don't think they're that expensive either.
And, but but they're not widely used at the moment. But maybe that's okay.
And in many ways, I think it would be beneficial on many different fronts. Firstly, people are clearly living longer than they were 20, 30, 40, 50 years ago. Um, and yet and yet are retiring on, on average at about the same age as they did in the past. And that may change and it may change as a result. Both of people realising they actually feel okay and work is less physically demanding certainly than it was 50 or 60 years ago, and probably less physically demanding than it was even 30 years ago.
And that may have still quite a long way to go, which would mean that people are able and, and on the whole, willing to work a bit longer. Employers might find that they can no longer take a view which may have been prevalent in the past, that they don't really want to offer a new job to somebody in their 50s or 60s, because there's lots of people in their 20s and 30s and 40s who are willing to work well if the demographics change the relative, as it almost certainly will in the UK, change the relative numbers of people in their 20s and 30s and 40s two people in their 60s, 70s and 80s.
Employers might just naturally, in their own economic, economic self-interest, be more consciously trying to hire more people at older age than they did in the past, and maybe to induce them to work. They offer more flexible work and part time work, and that this plays out to everybody's advantage in many ways, and certainly has fiscal benefits as well. I mean, one of the reasons why on our projections, as the proportion of the population in the 70s and 80s rises, it generates some fiscal pressures. Is that on the whole, at the moment, people in those parts of their life aren't paying an awful lot of income tax.
And that may be different down the road. And if it is, then it may be very it may be one of the most fiscally advantageous things. None of that's in in our projections, but we don't take account of those possibilities. Um, so I'm personally quite optimistic about that. I'm also optimistic about the other thing that you mentioned, which is, I mean, it's a form of technological progress. It's finding drugs that hopefully are not terribly expensive, don't have bad side effects, but are actually very effective.
Maybe if you start taking them at a younger age as protection against some of the, some of the big killers today, cardiac conditions, cancers, dementia. Um, I've heard medical people and people in the pharmaceutical industry. Um, wax lyrical on the benefits of statins, which is pretty well known, but other drugs which. People are discovering are, were never designed as protection against dementia or cardiac conditions, but seem to be very effective against those conditions. And then I don't think they're that expensive either.
And, but but they're not widely used at the moment. But maybe that's okay.
15:57
Speaker 5
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Speaker 5
Thank you. You said at one stage that people were living much longer, but retiring at the same sort of age. My impression was, and it's completely impressionistic, is that actually more and more older people are continuing in some sort of gainful employment?Uh, they're working longer in their life. Maybe it's because I'm in the House of Lords. I think, um, you know, I got the impression that that was evolving, but let's leave that aside. What you're suggesting is social and cultural change.
Yes. What I was actually asking, uh, is, is there a change to the tax base assuming the present set of circumstances of an ageing population is is there a change to the UK's tax base?Um, in. Terms of mechanisms that might be more suitable for an ageing society in order to reach a more sustainable fiscal backdrop.
Yes. What I was actually asking, uh, is, is there a change to the tax base assuming the present set of circumstances of an ageing population is is there a change to the UK's tax base?Um, in. Terms of mechanisms that might be more suitable for an ageing society in order to reach a more sustainable fiscal backdrop.
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Speaker 6
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Speaker 6
People working above the state employee National Insurance. Consistent with our. The fact that we can't model alternative policies. That's not something we've looked at in particular, but it clearly is a big age cliff edge in the in the tax system. Um, I think, I think the general question about the. Tax base and an aging society, like one, one thing that's quite clear from our work in this report is that demographics of a very large impact on the spending projections.
We do put those same demographic projections through lots of the largest taxes to produce our projections. And they don't have anywhere near as large effects. And some of the things that drive changes in tax are actually not related to the aging societies, things like kind of the transition to net zero that Tom's talked about, um. And, um, there we highlight the loss of revenues, but also things that have happened in recent years, in particular, the introduction of electric vehicle excise duty, which partially, um, offsets the loss of fuel duty revenues.
Um, so I guess David's right that the sort of question of, um, redesigning the tax system for an aging society is a very complex one. We probably don't have a. A prescription for you that we can offer now, but there's, there's other things driving, um, changes. To tax over the next 50 years. Net zero is one. And as I said, there have been some policies introduced that kind of partially address some of the loss of revenues. Another thing we look at which we might get into later is the risks around artificial intelligence for the tax base.
And so, um, the potential loss of revenues if, um, AI mainly substitutes for labor and, uh, because, um, corporate profits tend to be taxed at lower rates than labor income, wages and salaries. Uh, there's a risk there. And that's a kind of another complex set of issues to think about in terms of making the tax system fit for the future. So I think aging is one aspect to think about in relation to the tax system. Um, but there's also, you know, transition to net zero impacts of AI and other things we flagged in the report that are probably just as important as demographics on the tax side.
Okay.
We do put those same demographic projections through lots of the largest taxes to produce our projections. And they don't have anywhere near as large effects. And some of the things that drive changes in tax are actually not related to the aging societies, things like kind of the transition to net zero that Tom's talked about, um. And, um, there we highlight the loss of revenues, but also things that have happened in recent years, in particular, the introduction of electric vehicle excise duty, which partially, um, offsets the loss of fuel duty revenues.
Um, so I guess David's right that the sort of question of, um, redesigning the tax system for an aging society is a very complex one. We probably don't have a. A prescription for you that we can offer now, but there's, there's other things driving, um, changes. To tax over the next 50 years. Net zero is one. And as I said, there have been some policies introduced that kind of partially address some of the loss of revenues. Another thing we look at which we might get into later is the risks around artificial intelligence for the tax base.
And so, um, the potential loss of revenues if, um, AI mainly substitutes for labor and, uh, because, um, corporate profits tend to be taxed at lower rates than labor income, wages and salaries. Uh, there's a risk there. And that's a kind of another complex set of issues to think about in terms of making the tax system fit for the future. So I think aging is one aspect to think about in relation to the tax system. Um, but there's also, you know, transition to net zero impacts of AI and other things we flagged in the report that are probably just as important as demographics on the tax side.
Okay.
16:02
Speaker 1
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Speaker 1
Thank you very much. Can I ask can I ask you about inactivity?Um, obviously we've had the Millburn report on, uh, NEETs and the challenges we face and the challenges and the growing challenges we face with the cohort of 18 to 24 and younger people in our report on the aging society, we looked at inactivity amongst over 50s in the 50 to 65 group, which I think we were surprised was a significant an issue, as it has been the general debate about inactivity focuses on the pension age itself and how far up that should go.
Where would you, from a fiscal point of view or fiscal dividend point of view?Where do you think the most profitable cohort is to focus on in terms of increasing?Where's where's the biggest bang for the buck from a, from a fiscal point of view, as it were, in reducing inactivity.
Where would you, from a fiscal point of view or fiscal dividend point of view?Where do you think the most profitable cohort is to focus on in terms of increasing?Where's where's the biggest bang for the buck from a, from a fiscal point of view, as it were, in reducing inactivity.
16:02
Speaker 6
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Speaker 6
Thank you. I have a first go at that. Um, so the first question is kind of what I think there's two parts to that. It's kind of what what could the fiscal impact be?And where should you focus?The first of those is something we looked at around when you were doing your, your, um, aging society report. Actually in our 2023 fiscal sustainability report. And I should, as always on this topic, caveat that as you probably know, the data from the ONS Labour Force survey has been challenging over recent years.
So it's. Hard to form a clear picture. But like in the latest data. And that survey has been slowly improving. I think two things are clear. One is that it is even more the case that health related reasons are dominating the rise in inactivity, and that there has been a sort of there does seem to have been a rise since the start of the pandemic. Maybe around 700 000 people since early 2020. And the last stats I looked at, um, so in our 2023 report, we said, well, what if you reduced health related inactivity by half a million?So most of that post pandemic rise we've seen, um, just looking over the five year forecast period.
So we're back in the medium term now, that could reduce borrowing by about 20 billion and debt by about 3% of GDP. And that comes about two thirds from higher tax revenues, from more people working, and about one third from welfare savings. So that's, um, I mean, that's something we did a few years ago now, but I think that gives you an idea that yes, there would be a fiscal benefit. Inactivity. And that, you know, could play out in amplified ways over the longer term.
Um, on the question of where to focus, um, I. Guess, well, it's obviously not, as I've said previously, for the OBR to advise on specific policies, but the general points I'd make are that, um, I guess age itself is not always the best prism to think about what to do. And it's probably the underlying reason for inactivity where health seems to be a really big thing. The duration of inactivity and the sort of the skill level and job readiness of inactive people that are as important.
Um, and then the, the, the other caveat I'd make is that I think in this area, it's really tempting to look at who is inactive now and think, well, how far away are they from the labour market?What could be done to get them into work?But I'd say it's just as important to think about kind of preventing the outflow from work to inactivity. So just getting people back into work is sort of dealing with the problem after it's occurred. Rates of entry to work from inactivity are very, very low.
So you can probably do just as much to try and prevent people from getting into that state in the first place. And that might be about, um, when people get ill in work or transitions from education or other things. Um, so those were my caveats, but now I'll actually answer your question, which is that, um, uh, I think since we did our work a few years ago, you did your report, the evidence has got very much stronger around young people being a real source of the issue.
Um. The, I looked at the data this morning and since kind of 2023, inactivity among young people's carried on rising, whereas has actually been falling among the over 50. So I do think the picture has substantially changed since you did your work. And we did ours a few years ago. Um, and. On top of that, there's the kind of intuitive point that young people have much more of their lives ahead of them. So anything successful you can do to intervene could have social benefits for the individuals and fiscal benefits for all of us.
They extend over many decades rather than just years. And I think that's backed up by some of the evidence in Alan Milburn's interim report around scarring. So he gathers, I think, a very impressive collection of academic work over a number of decades, showing that, um, periods of inactivity when you're young affect. Your earnings and employment over maybe 10 or 20 years, maybe even longer. But they also affect things like your health outcomes over that period of time. So, um, I'd normally say it's a bit sort of simplistic or.
Binary to just kind of pick an age cohort and focus there. And I do emphasize my point that you want to think about the reasons and the duration and not just kind of age, but it does seem increasingly clear that the inactivity problem is being concentrated among the under 25. And there's a growing body of evidence that it might be hard. But if you can arrest those challenges, it will have much longer term impacts because they've got so much of their lives ahead of them.
So it's. Hard to form a clear picture. But like in the latest data. And that survey has been slowly improving. I think two things are clear. One is that it is even more the case that health related reasons are dominating the rise in inactivity, and that there has been a sort of there does seem to have been a rise since the start of the pandemic. Maybe around 700 000 people since early 2020. And the last stats I looked at, um, so in our 2023 report, we said, well, what if you reduced health related inactivity by half a million?So most of that post pandemic rise we've seen, um, just looking over the five year forecast period.
So we're back in the medium term now, that could reduce borrowing by about 20 billion and debt by about 3% of GDP. And that comes about two thirds from higher tax revenues, from more people working, and about one third from welfare savings. So that's, um, I mean, that's something we did a few years ago now, but I think that gives you an idea that yes, there would be a fiscal benefit. Inactivity. And that, you know, could play out in amplified ways over the longer term.
Um, on the question of where to focus, um, I. Guess, well, it's obviously not, as I've said previously, for the OBR to advise on specific policies, but the general points I'd make are that, um, I guess age itself is not always the best prism to think about what to do. And it's probably the underlying reason for inactivity where health seems to be a really big thing. The duration of inactivity and the sort of the skill level and job readiness of inactive people that are as important.
Um, and then the, the, the other caveat I'd make is that I think in this area, it's really tempting to look at who is inactive now and think, well, how far away are they from the labour market?What could be done to get them into work?But I'd say it's just as important to think about kind of preventing the outflow from work to inactivity. So just getting people back into work is sort of dealing with the problem after it's occurred. Rates of entry to work from inactivity are very, very low.
So you can probably do just as much to try and prevent people from getting into that state in the first place. And that might be about, um, when people get ill in work or transitions from education or other things. Um, so those were my caveats, but now I'll actually answer your question, which is that, um, uh, I think since we did our work a few years ago, you did your report, the evidence has got very much stronger around young people being a real source of the issue.
Um. The, I looked at the data this morning and since kind of 2023, inactivity among young people's carried on rising, whereas has actually been falling among the over 50. So I do think the picture has substantially changed since you did your work. And we did ours a few years ago. Um, and. On top of that, there's the kind of intuitive point that young people have much more of their lives ahead of them. So anything successful you can do to intervene could have social benefits for the individuals and fiscal benefits for all of us.
They extend over many decades rather than just years. And I think that's backed up by some of the evidence in Alan Milburn's interim report around scarring. So he gathers, I think, a very impressive collection of academic work over a number of decades, showing that, um, periods of inactivity when you're young affect. Your earnings and employment over maybe 10 or 20 years, maybe even longer. But they also affect things like your health outcomes over that period of time. So, um, I'd normally say it's a bit sort of simplistic or.
Binary to just kind of pick an age cohort and focus there. And I do emphasize my point that you want to think about the reasons and the duration and not just kind of age, but it does seem increasingly clear that the inactivity problem is being concentrated among the under 25. And there's a growing body of evidence that it might be hard. But if you can arrest those challenges, it will have much longer term impacts because they've got so much of their lives ahead of them.
16:07
16:08
16:08
Speaker 5
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Speaker 5
Um, well, that is the case. Yes. Is also the case that if the. Government delivers on its medium term consolidation, then that means that the unsustainable rise in debt kind of happens quite a bit later than if that medium term consolidation is is not achieved. And the starting point for the projections is the kind of current level of the deficit, which is relatively high by international standards. So sorry, by by historical standards. Um, so I think that is an important finding in our report that early action action.
Now to get the public finances on a sustainable footing is really important in terms of being in a better position to be able to face these longer term pressures. Um, but yes, but it is also true that even if the government does deliver on that consolidation, then a further adjustment over time would be needed to prevent debt. Uh, moving on to the unsustainable trajectory. And we show that, you know, essentially taking that additional action earlier rather than later is much less costly. But than, than delaying.
Now to get the public finances on a sustainable footing is really important in terms of being in a better position to be able to face these longer term pressures. Um, but yes, but it is also true that even if the government does deliver on that consolidation, then a further adjustment over time would be needed to prevent debt. Uh, moving on to the unsustainable trajectory. And we show that, you know, essentially taking that additional action earlier rather than later is much less costly. But than, than delaying.
16:09
Speaker 10
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Speaker 10
But isn't it therefore, the case that um, the, um, medium term fiscal targets are in danger of producing a sense of complacency, which is not justified. And that, um they are in a sense misleading because they don't prevent the country being on the path to an unsustainable debt position. Um is that correct?
16:09
Speaker 5
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Speaker 5
Well, so it's certainly the case that the, uh, the. The current medium term consolidation plan, essentially is just about sufficient to prevent a rise in debt in the medium term and get debt on a kind of stable, slightly falling path in the medium term. And I think, you know, is essentially the sort of minimum that you might think as being consistent with kind of sustainable public finances. Uh, but yes, as you say, it is not sufficient over the longer term to just do that and then think no other fiscal adjustment will be necessary.
It will be necessary. You know, if these projections are right and turn and start to materialise for governments to take further action after the end of the medium term, uh, forecast. I mean, it is also the case that, as I said earlier, the current medium term fiscal consolidation plan is one that I mean, does does, would deliver a fairly significant reduction in borrowing. It would get the deficit down to a level that I think would be its lowest since around 2000. You know, it's not to say that the current government plan is not making any progress towards getting sustainable.
The public finances on a more sustainable path. It does represent, you know, a reasonably material fiscal consolidation. But yeah, and our our analysis suggests that more would need to be done subsequently.
It will be necessary. You know, if these projections are right and turn and start to materialise for governments to take further action after the end of the medium term, uh, forecast. I mean, it is also the case that, as I said earlier, the current medium term fiscal consolidation plan is one that I mean, does does, would deliver a fairly significant reduction in borrowing. It would get the deficit down to a level that I think would be its lowest since around 2000. You know, it's not to say that the current government plan is not making any progress towards getting sustainable.
The public finances on a more sustainable path. It does represent, you know, a reasonably material fiscal consolidation. But yeah, and our our analysis suggests that more would need to be done subsequently.
16:11
16:11
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16:11
Speaker 8
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Speaker 8
My question follows on from Lord Butler. And, um, we've talked for many, many years about the sustainability or otherwise of our debts. The um it's been a feature of. Well, for the last 20 years at least, it's now touching over 100% or touching almost 100%. But it's continuing to rise. Now, we've talked also about what action that could be taken, both in the short term and in the long term. And David, you said it's a matter that's got to be dealt with today rather than tomorrow.
The it's a serious issue. And in the for S you also emphasize that fiscal risks of not taking action. The risks involved in government inaction. So the. So my question really relates to that. And the point that Lord Butler was making. Are there any examples that you can point to of any government dealing with an unsustainable fiscal pathway of the scale we face in the UK?Without that government being forced into doing so by a monumental crisis, and one that you, as you referred to, Tom.
The it's a serious issue. And in the for S you also emphasize that fiscal risks of not taking action. The risks involved in government inaction. So the. So my question really relates to that. And the point that Lord Butler was making. Are there any examples that you can point to of any government dealing with an unsustainable fiscal pathway of the scale we face in the UK?Without that government being forced into doing so by a monumental crisis, and one that you, as you referred to, Tom.
16:13
Speaker 5
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Speaker 5
Yeah. So, I mean, it is certainly the case that unfortunately, a lot of countries have only confronted these issues properly when faced with a fiscal crisis. But there are also examples of where debt has successfully fallen, actually quite significantly outside of the crisis. And I mean, an example actually is, is the UK after. The Second World War, where debt was at a very high level coming out of out of the war and also the, you know, based basically war debt had been pushed up as a consequence of both the First World War and the Second World War to very high levels.
Um, it came down fairly rapidly in the sort of three decades or so following the Second World War. Uh, that was driven by a few different factors. One is that. For much of that period, we had economic growth that was significantly higher than the kind of interest rate the government was paying on its debt. And that is a big factor that allows debt as a share of GDP to fall. If you've got a strongly rising economy and the cost of your debt is, is, is lower.
Um, and that was that, that was driven by a combination of kind of strong growth after the war, favourable demographics, um, lots of new people entering the labour market as well as actually various kind of regulatory factors, in part that kept interest rates down.
Um, it came down fairly rapidly in the sort of three decades or so following the Second World War. Uh, that was driven by a few different factors. One is that. For much of that period, we had economic growth that was significantly higher than the kind of interest rate the government was paying on its debt. And that is a big factor that allows debt as a share of GDP to fall. If you've got a strongly rising economy and the cost of your debt is, is, is lower.
Um, and that was that, that was driven by a combination of kind of strong growth after the war, favourable demographics, um, lots of new people entering the labour market as well as actually various kind of regulatory factors, in part that kept interest rates down.
16:14
16:14
Speaker 5
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Speaker 5
I guess. That is true. I guess what in that case, what happened was that the the the rise in debt was caused by the crisis. What we didn't have was then a sort of fiscal crisis which forced the government to address the, the, the large stock of debt. Um it managed to get debt down through, uh, as I say, a combination of kind of higher growth, lower interest rates, but also by running, uh, very low deficits, um, for quite a substantial period of time.
Um, it, I mean, it did help over that period as well that, uh, governments were. Able to reduce defence spending quite substantially. It's obviously at very high levels during the war and after the war. And the fact that governments were able to reduce spending on defence kind of allowed room for other government spending priorities, um, to be delivered while also reducing debt. So I think there.
Um, it, I mean, it did help over that period as well that, uh, governments were. Able to reduce defence spending quite substantially. It's obviously at very high levels during the war and after the war. And the fact that governments were able to reduce spending on defence kind of allowed room for other government spending priorities, um, to be delivered while also reducing debt. So I think there.
16:28
Speaker 5
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Speaker 5
Thank you. So. Well, just to finish off, I guess, period after the Second World War in the UK is a period where debt fell quite rapidly and it was driven by factors, I guess, favourable demographics, strong economic growth, low interest rates, helped by defence spending falling and all of those factors, I guess are not ones, unfortunately, that we are sort of experiencing now, where, as the report shows, the demographics are rather unfavourable from a fiscal point of view. We've had a period of low growth.
Um and most recently high interest rates. And now of course, also after a period of defence spending falling, we're now entering a period where defence spending is rising again. So yeah, unfortunately those sort of factors that helped bring down debt in the post-Second World war period. Now we're sort of not able to benefit from currently.
Um and most recently high interest rates. And now of course, also after a period of defence spending falling, we're now entering a period where defence spending is rising again. So yeah, unfortunately those sort of factors that helped bring down debt in the post-Second World war period. Now we're sort of not able to benefit from currently.
16:29
Speaker 8
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Speaker 8
It's just I get the impression that the governments of all different colors, but governments, they put off dealing with the unsustainability of debt, the its end of the day, whereas I think the the OBR is saying that the the trajectory is so great that it should be dealt with. Now. Otherwise future generations, they're going to suffer. It's the. I think in the report he refers to this. The young people of tomorrow that will suffer unless we take action now.
But it's very, very difficult for a government to take action of such magnitude. If the. If they're just seeking to deal with everything over a five year period, you know, the normal way of government. But it seems from what you're saying, that you do need to deal with it now. But how do you how do you get the. Will to actually do that?
But it's very, very difficult for a government to take action of such magnitude. If the. If they're just seeking to deal with everything over a five year period, you know, the normal way of government. But it seems from what you're saying, that you do need to deal with it now. But how do you how do you get the. Will to actually do that?
16:30
Speaker 5
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Speaker 5
Well, yeah. So I mean, on on your questions, the the report is saying that both the costs of taking action early to deal with these kind of pressures are much lower overall than the costs that would result if you were to delay dealing with the pressures to much later down the line. In fact, we have some analysis which shows that the sort of, if you deal with the the pressures early, the cost is around half of what it would be if you were to delay for a couple of decades and then try and deal with it.
Really, when you're in the midst of the kind of upward trajectory of, of, um, debt, I guess the other thing I would say is kind of consistent with the discussion we've been having at this session, you know, we, our job is not to recommend a particular, particular policy. Uh, prescription for dealing with these pressures. But the report does recognise that there are difficult trade offs and cost of benefits from all of the potential ways of dealing with these pressures, and therefore, that suggests to us that governments would need to take action across a number of different fronts, spending and possibly taxation.
Uh, and it would be very difficult to deal with it through just one route.
Really, when you're in the midst of the kind of upward trajectory of, of, um, debt, I guess the other thing I would say is kind of consistent with the discussion we've been having at this session, you know, we, our job is not to recommend a particular, particular policy. Uh, prescription for dealing with these pressures. But the report does recognise that there are difficult trade offs and cost of benefits from all of the potential ways of dealing with these pressures, and therefore, that suggests to us that governments would need to take action across a number of different fronts, spending and possibly taxation.
Uh, and it would be very difficult to deal with it through just one route.
16:31
16:31
Speaker 4
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Speaker 4
Think your question is, is profoundly important political one, which is how do governments. Get the support of the public to do something that's very difficult right now. And I think the answer to that difficult question is they have to be honest with the public about what the risks are if they don't do that, which will affect their the young people of today who are already here, their children, their grandchildren and the unborn, frankly. If you could build a consensus amongst the public that that is the right thing to do almost morally, then I think it becomes politically feasible to do it.
But without that, I think it's very difficult because people say, well, why are you cutting back on services?Why are you increasing these taxes?Why are things getting worse for us right now?And there'll always be another political party which will say, well, these people are hopeless who are in power now. Vote for us at the next election and we'll you won't need to do these terrible things because they're incompetent. So, I mean, it seems to me that you have to level with the public about.
What might be down the road. No one's certain, of course, and we could get lucky. And you don't need to do these dramatic things because technology goes in a certain direction and productivity does. But you wouldn't want to bank on that and just gamble that the next generation, most of whom are already alive, they're just young people. You wouldn't want to take a gamble that, well, maybe you'll get lucky and things will turn out okay, and you won't need to face these very, very difficult fiscal situations 20, 25, 30 years from now.
But without that, I think it's very difficult because people say, well, why are you cutting back on services?Why are you increasing these taxes?Why are things getting worse for us right now?And there'll always be another political party which will say, well, these people are hopeless who are in power now. Vote for us at the next election and we'll you won't need to do these terrible things because they're incompetent. So, I mean, it seems to me that you have to level with the public about.
What might be down the road. No one's certain, of course, and we could get lucky. And you don't need to do these dramatic things because technology goes in a certain direction and productivity does. But you wouldn't want to bank on that and just gamble that the next generation, most of whom are already alive, they're just young people. You wouldn't want to take a gamble that, well, maybe you'll get lucky and things will turn out okay, and you won't need to face these very, very difficult fiscal situations 20, 25, 30 years from now.
16:33
16:33
Speaker 13
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Speaker 13
Topic of getting lucky or or a more optimistic, uh, kind of potential scenario. Um, Laura, you touched on, um, the potential risks from AI in terms of its impact on the labour market and therefore the tax base. There is also a potential upside from technology, AI, uh, in terms of cost, uh, reducing potential productivity, increasing potential, um, do you see any signs, um, of. That more optimistic, uh, narrative?And if you were looking for evidence for that or for, or against that, what, what would you be looking for?And of course, there may be a mixed scenario where you get positive sides for our future fiscal sustainability and some of those risks that you touched on as well.
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16:34
16:34
16:34
Speaker 4
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Speaker 4
Well, so I hope I haven't brought you this before, but two of the most recent winners of the Nobel Prize in economics, Daron Acemoglu and Philip Aguilar, both got their Nobel Prizes for work on growth and technology, and have done lots of work on AI. And one of them, Acemoglu, thinks that it will have negligible impact on productivity and the quality of life for most people, and there may be more downsides than than upsides. Who won it, I think last year, is the latest winner of the Nobel Prize, thinks it will be transformational and it will boost productivity enormously and have hugely positive effects on the standard of living and probably have huge fiscal benefits.
So, I mean, they're just all all over the place. Um, what we've done. You know, we've got a central scenario where we allow for a meaningful but definitely not transformational impact of artificial intelligence on productivity. And it's one of the reasons why in our projections we've got productivity growth a lot, really a lot faster than it's been for the last 20 years. Um, but relative to the optimists, that is ludicrously pessimistic. Um, I. Think it's one of those things where the range of opinions is so wide and well-informed people are all cover the whole spectrum of views that all one can end up doing in terms of these kind of projections is to say, well, here's a sort of central projection.
And here's a significant upside. But the significant upside, as we've called it, may, may turn out to be more pessimistic than the actual outturns. All of all that, of course, makes it very difficult. Then coming back to this question to say, well, what what do you what do you then tell the current generation in terms of what we should do on fiscal policy and taxes and public services and all that, when there's, you know, a chance maybe maybe a quite a high chance that actually you don't need to do all that fiscal tightening because 20 years from now, standards of living will be way higher.
And it'll all be very easy to deal with. I think my response to that is, well, that might be true, but do you want do you really want to roll the dice for a future generation and say, well, there's a chance it'll all be okay for you, but there's a significant chance it'll be really difficult. You know, that's then becomes almost a moral question about what risks are you willing to impose on young people and the unborn one?
So, I mean, they're just all all over the place. Um, what we've done. You know, we've got a central scenario where we allow for a meaningful but definitely not transformational impact of artificial intelligence on productivity. And it's one of the reasons why in our projections we've got productivity growth a lot, really a lot faster than it's been for the last 20 years. Um, but relative to the optimists, that is ludicrously pessimistic. Um, I. Think it's one of those things where the range of opinions is so wide and well-informed people are all cover the whole spectrum of views that all one can end up doing in terms of these kind of projections is to say, well, here's a sort of central projection.
And here's a significant upside. But the significant upside, as we've called it, may, may turn out to be more pessimistic than the actual outturns. All of all that, of course, makes it very difficult. Then coming back to this question to say, well, what what do you what do you then tell the current generation in terms of what we should do on fiscal policy and taxes and public services and all that, when there's, you know, a chance maybe maybe a quite a high chance that actually you don't need to do all that fiscal tightening because 20 years from now, standards of living will be way higher.
And it'll all be very easy to deal with. I think my response to that is, well, that might be true, but do you want do you really want to roll the dice for a future generation and say, well, there's a chance it'll all be okay for you, but there's a significant chance it'll be really difficult. You know, that's then becomes almost a moral question about what risks are you willing to impose on young people and the unborn one?
16:37
Speaker 13
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Speaker 13
Of the challenges that we've heard in other evidence sessions covering some of this area is, um, the potential, uh, pace at which AI might bring about change. Um, could be significant. And, um, therefore, um, the gap between having signals about what direction it may go in and actually kind of being quite far down that path could be quite small. But if, if you were looking for, um, in the next, the next time you update this report, signals of one impact or another, where, where would you be looking?Whether it was positive or negative, what kind of evidence would you be looking at?Or is it still.
Too difficult to see impact in. Day to day life in the numbers.
Too difficult to see impact in. Day to day life in the numbers.
16:38
16:38
Speaker 4
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Speaker 4
One could look at and where it might show up is in employment trends and whether or not there are companies that have decided not. Not because they were pessimistic about their future and demand for their product. They could be very optimistic about that. But they've cut back enormously on hiring because they're clearly switching AI in place of people. Although people worry a lot about that, I'm not I'm not sure there are any obvious signs right now that that is happening. It might it might be one of the first the first signs.
And if it is, of course, it's a sign, which is a two edged sword. I mean, it's bad news for people who are hoping to get jobs with those companies. You might say it was good news in terms of labour productivity. But that's that may be where you see it coming most clearly. I don't I don't think it's emerged yet, although there's lots of stories in the media about this is the future. They're kind of stories about the future at the moment.
Okay.
And if it is, of course, it's a sign, which is a two edged sword. I mean, it's bad news for people who are hoping to get jobs with those companies. You might say it was good news in terms of labour productivity. But that's that may be where you see it coming most clearly. I don't I don't think it's emerged yet, although there's lots of stories in the media about this is the future. They're kind of stories about the future at the moment.
Okay.
16:39
16:39
Speaker 9
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Speaker 9
Um. When we're not talking to you, we're at the moment thinking about, um, fiscal devolution and its potential impact. And there are a number of arguments for or against, uh, fiscal devolution, but one of them, um, which is very much in your purview really, um, is in, um, in terms of growth. Um, and I wondered whether you'd given any thought to, um, whether fiscal devolution and if so, what kind might have a material impact on your projections.
16:40
Speaker 5
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Speaker 5
I can take that. Thanks. I mean that is not something that we have done a specific piece of analysis on. Um, at the current time. We obviously, you know. The new government is coming in with this being a big focus of their policy agenda. And so, uh, you know, we, we will assess any kind of policy that is given to us by the new government on, on devolution. And look at the evidence there, I guess.
I mean, there's clearly a wide range of possibilities under the banner of devolution from changing sort of structure of subnational government, more devolution of public service delivery, devolution of tax raising powers, borrowing powers. So, uh, a wide range of potential policy options, which might have very different, different economic and fiscal implications, I guess for us, one factor will be the degree of certainty around which you could assess the potential economic, uh, impacts of those kind of reforms. I guess by their nature, their reforms that are likely to take quite a long time.
Uh, to implement through, I guess, changes at the, at the national level, then changes at the regional or local level. Then. You know, policy choices at the regional and local level, that which you won't necessarily know at the start in terms of how those will kind of pan out and therefore the, um, the economic and fiscal implications of, of those, I guess an example is the devolution of tax raising powers to Scotland and Wales, which, uh, took in the case of Scotland, took about nine years from the first recommendation to do that through to the point at which Scotland actually had the ability to change income tax rates and did so.
Whereas in, in Wales it was around seven years. And then so far they've decided not to change rates at all. So I guess from our perspective of trying to sort of forecast the impact of those sort of policies, um. There will be quite a lot of certainty around both the nature, the timing of those sort of changes. And then what the actual final impact would be of devolving those sort of powers. Um. I mean, it may also be that I guess devolution is, has a range of different policy objectives, some of which is potentially around growth, but others may be more around sort of better ability to kind of target and deliver public services, which obviously could be very important.
Um, but is a bit outside of our area of focus, um, at least in the kind of medium term. I mean, that sort of thing could obviously have longer term benefits for economic growth. But again, might, might come, um, quite, quite far in the future. Right.
I mean, there's clearly a wide range of possibilities under the banner of devolution from changing sort of structure of subnational government, more devolution of public service delivery, devolution of tax raising powers, borrowing powers. So, uh, a wide range of potential policy options, which might have very different, different economic and fiscal implications, I guess for us, one factor will be the degree of certainty around which you could assess the potential economic, uh, impacts of those kind of reforms. I guess by their nature, their reforms that are likely to take quite a long time.
Uh, to implement through, I guess, changes at the, at the national level, then changes at the regional or local level. Then. You know, policy choices at the regional and local level, that which you won't necessarily know at the start in terms of how those will kind of pan out and therefore the, um, the economic and fiscal implications of, of those, I guess an example is the devolution of tax raising powers to Scotland and Wales, which, uh, took in the case of Scotland, took about nine years from the first recommendation to do that through to the point at which Scotland actually had the ability to change income tax rates and did so.
Whereas in, in Wales it was around seven years. And then so far they've decided not to change rates at all. So I guess from our perspective of trying to sort of forecast the impact of those sort of policies, um. There will be quite a lot of certainty around both the nature, the timing of those sort of changes. And then what the actual final impact would be of devolving those sort of powers. Um. I mean, it may also be that I guess devolution is, has a range of different policy objectives, some of which is potentially around growth, but others may be more around sort of better ability to kind of target and deliver public services, which obviously could be very important.
Um, but is a bit outside of our area of focus, um, at least in the kind of medium term. I mean, that sort of thing could obviously have longer term benefits for economic growth. But again, might, might come, um, quite, quite far in the future. Right.
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Speaker 5
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Speaker 5
Well, so we do, we have a, we have a role in forecasting, uh, Scottish and Welsh tax revenues. And that's the role we've had for, for a few years. We don't do a separate economic growth forecast for either Scotland or Wales. We just do a UK wide um. Macroeconomic forecast. So we've not done any work specifically at looking at the impact that devolution of income tax has had on economic performance in those countries.
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Speaker 5
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Speaker 5
I mean the um from a fiscal perspective. Which is our main focus, I guess there are a number of kind of risks that you might think about in relation to devolution. Uh, one is around the risk that you devolve responsibility for public service delivery, but potentially not the funding necessary to deliver that. And therefore that kind of creates additional pressure on public spending, because the local area is sort of incentivized to try and deliver more, but might not have the funding to do it and eventually will call on central government for additional funding.
Um. On the tax devolution side of things, there is, you clearly a risk that you get in that you can create incentives for kind of tax competition between regions. And I guess that is particularly a risk potentially in the UK where we're quite densely populated. Uh, and a lot of these areas are quite close to each other. So if you have different tax rates in areas that are very close to each other, then obviously that could potentially create incentives around kind of household and business location and quite a lot of complexity potentially in the, in the tax system.
Um, so I think, yeah, that is a risk that. Um, policymakers would need to think about from a kind fiscal perspective. And also just the fact that devolution of revenue brings with it to those areas kind of risk around revenue volatility, which can be greater in a smaller area where the tax base is more concentrated. And I think that that is certainly an issue that the governments in Scotland and Wales have faced, that the um if the if the revenues from devolved income tax do not come in as forecast and they have quite limited borrowing powers, that allows them to sort of cushion that revenue volatility, that's been an additional challenge for them to deal with.
Um. On the tax devolution side of things, there is, you clearly a risk that you get in that you can create incentives for kind of tax competition between regions. And I guess that is particularly a risk potentially in the UK where we're quite densely populated. Uh, and a lot of these areas are quite close to each other. So if you have different tax rates in areas that are very close to each other, then obviously that could potentially create incentives around kind of household and business location and quite a lot of complexity potentially in the, in the tax system.
Um, so I think, yeah, that is a risk that. Um, policymakers would need to think about from a kind fiscal perspective. And also just the fact that devolution of revenue brings with it to those areas kind of risk around revenue volatility, which can be greater in a smaller area where the tax base is more concentrated. And I think that that is certainly an issue that the governments in Scotland and Wales have faced, that the um if the if the revenues from devolved income tax do not come in as forecast and they have quite limited borrowing powers, that allows them to sort of cushion that revenue volatility, that's been an additional challenge for them to deal with.
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Speaker 5
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Speaker 5
Well, so we have actually so the the way we tend to do these reports is that one year we focus on the kind of longer term projections, which is what we did this year. And then the other year we do more, um, in depth, uh, look at particular sources of risk. We have kind of flagged in this report that a couple of areas that we might look at next year. One is on climate change, where we've done work in the past on the risks, fiscal risks from climate change damage and the costs of the transition to net zero, the sort of missing piece of the analysis is around the costs of adaptation to deal with the damage from climate change.
So we may do that next year. We've also talked about doing a deep dive into kind of education spending because. Uh, basically it's the, it's the main large area of public spending that we've not done in the past. So we've done pensions, we've done health, we've done defence. Um, so we thought we might look at education in more detail next year, but we're basically also open for ideas. So there's.
So we may do that next year. We've also talked about doing a deep dive into kind of education spending because. Uh, basically it's the, it's the main large area of public spending that we've not done in the past. So we've done pensions, we've done health, we've done defence. Um, so we thought we might look at education in more detail next year, but we're basically also open for ideas. So there's.
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Speaker 1
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Speaker 1
A good early indication possible anyway unless any colleagues have any further questions. Listen um Laura David, Tom, we're very grateful. Thank you so much for your time. Really appreciate it. Um, and I hope this is the beginning of a wider, uh, effort on the part of Parliament to take the fiscal risks and sustainability seriously. As we've talked about a few times now. Thank you again for your time. And with that, the meeting is finished.