Consultancy PricewaterhouseCoopers has warned that the government must adopt long-term strategies to reducing public debt, as present fiscal policies are likely to push up costs of care and state pensions.
To cope with the increasing cost of age-related issues, the state pension age has to be increased to 70 years from the proposed 68 by 2046, the report titled ‘How Sustainable are the UK Public Finances in the Long Run?, warned.
The 30 page PwC report follows on the heels of OBR’s report (Office for Budget Responsibility) on long-term UK budget sustainability and economist Andrew Dilnot Commission’s report, both of acknowledged about the rising cost of care.
“Raising the state pension age faster than current legislation allows for is likely to be needed and would mitigate long-term cost pressures somewhat. In a report last year, we argued for a rise in the state pension age to 70 by 2046 rather than 68 as currently planned, which we estimate would have a net benefit for the public finances of around 0.7 per cent of GDP by 2050. This would be broadly in line with the likely effect of raising the state pension age in line with life expectancy, which the government has indicated would be its preferred policy”, the PwC report observed.
In order to bring back public debt to below 40 percent of the country’s GDP by 2050, the level achieved in 2007 before the economic crisis had hit, the government would require fiscal tightening of 1.3 percent of GDP by 2020.
To achieve the target, the consultancy suggested savings of £20 billion by either raising the standard rate of VAT by 4 percentage points, or both employer and employee national insurance contribution by 2 percentage points.
The report also projected long-term care cost rising to 2.2 percent of GDP from the current 1.1 percent by 2049/2050. State pension spending will be about 6.8 percent in the same period compared to the present 5.5 percent, while overall age-related expenses will touch 27.1 percent of GDP from the current 22.5 percent.
“The government has already taken steps to address this problem through reforms to public sector pensions and has started the process of raising the state pension age. But the bigger challenge relates to health and long-term care costs”, said John Hawksworth, chief economist of PwC.