With an election being discussed, it is interesting to speculate on key economic issues which should feature in the parties’ manifestos, but, with the focus on Brexit, have had little attention given to them over the past three years.
The UK’s economic outlook is looking better than it has for many years; unemployment is at 3.9%, the lowest level for 45 years, inflation in June was running at the government’s 2% target and the budget deficit is down to 1.1% of GDP from 9.9% in 2010, although predicted to rise to 2% following the Chancellor’s recent announcements. Although not something the UK can control, what happens overseas will impact on the UK but is difficult to predict with certainty. Although China’s economy grew at an annual rate of 6.2% between April and June, 2019, a rate far beyond anything we can dream of, this represents a slowdown from 6.4% in the first quarter. This 0.2% fall is not large, but it does indicate that the Chinese economy is slowing, possibly caused by tariffs imposed by the US or by a more general slowdown in their economy which the Chinese government have been trying to tackle by encouraging bank lending and cutting taxes. This matters for the UK because China is such a significant part of the world economy and their slowdown will impact on UK exports. How we respond to such issues will be affected by how the new government addresses our long-term problem of low productivity.
Another issue which has an economic impact is the action which the country takes to offset global warming and reduce climate change. Ironically, if government measures to reduce the use of fossil fuels are successful, there is likely to be a significant impact on government revenue since fuel taxes and vehicle excise duties (not levied on electric vehicles) contribute significantly to government revenue. The Office for Budget Responsibility estimate that fuel duty will raise £28.4 billion this year, 3.5% of all government receipt, equivalent to £1,000 per household, 1.3% of GDP. They also expect VED to raise £6.5 billion in 2019-20 representing 0.8% of government receipts and equivalent to approximately £230 per household, 0.3% of GDP.
Possibly the key issue, not unique to Britain, is our ageing population. In 1991, 65 year old males and females had a life expectancy of 79 and 83 respectively; by 2012, this had increased by four years and is continuing to increase. This will have four effects. Firstly, there will be an increased demand for goods and services used by older people of which a major one is health care. As medical technology improves and people live longer, there is an increased burden on the NHS. As increasing numbers of people reach their early 80s, 85% are likely to have a long-term health condition, needing medical treatment which is increasing the burden on the NHS as people who would previously have died in their 60s or 70s are now living into their 80s and 90s because of medical improvements.
Secondly, there will be an increased need for social care. By the time people reach their late eighties, more than one third experience difficulties undertaking daily living tasks unaided and therefore require assistance either from their local authority or paid for privately. Currently the adult social care bill accounts for 1.2% of GDP and this is expected to increase significantly as life expectancy increases. Who pays for this is a key question.
Thirdly, there will be an impact on the housing market since, as people live longer and are often on their own, there should be an increased demand for smaller accommodation such as one person flats and retirement homes. However, the costs of moving and stamp duty, which is paid by the buyer on the value of the purchased property on a sliding scale above £125,000, deter some older homeowners from downsizing.
Finally, and possibly most importantly, as people live longer, the pension burden increases. Even with the raising of the retirement age, pension spending is due to increase from 5% of GDP to 6.9% in 50 years. To pay for this, will the working population need to pay more, will retirement ages be increased still further or will today’s workers be expected to save more for their retirement?