Ministers should consider raising the state pension age significantly and charging for some NHS treatments in order to defuse a “debt time bomb”, a think tank has recommended.
Public spending needs to be slashed for the foreseeable future to help bring the national debt down to a sustainable level, a report produced by the Institute of Economic Affairs (IEA) said.
The report recommended expanding the use of charging in the NHS or even moving to a system paid for through compulsory healthcare insurance.
It also suggested reducing the level of the state pension and abolishing the Government’s “triple lock” system, which guarantees a rise of at least 2.5% a year, with increases instead linked only to inflation.
A more fundamental reform suggested by the report would be to replace the state pension with compulsory private defined-contribution schemes.
In order to reduce the debt-to-GDP ratio to 20 per cent by 2063/64, the report said cuts equivalent to £168 billion a year, or around a quarter of public spending, would be required.
The report said the Government’s existing austerity measures would not alter the “unsustainable” direction of the public finances, largely due to the country’s ageing population.
Tax rises of 14% of GDP would be needed to fill the black hole, but “this would be impossible to achieve”, the report said, so spending must be reduced.
“Even assuming that the next government delivers the deficit reduction agenda outlined by the current government through to 2018/19, our ageing population means that, on current policies, our public finances are unsustainable in the longer term,” the report said.
“The pay-as-you-go nature of the provision of pensions and healthcare means that the current working generation meets the cost of today’s elderly and retired.
“With a shrinking relative size of the working population and higher demands for healthcare and pensions for an older population, the underlying fiscal position is unsustainable.
“IEA research has estimated that, given future spending commitments, achieving long-term fiscal balance in the UK would require immediate tax rises maintained in the indefinite future of 14% GDP. This would be impossible to achieve, because such an increase in tax rates would lead to a fall in economic growth.
“Alternatively, spending cuts of around one quarter of all government spending or cuts of around one half of all health and social protection spending would be necessary.
“In other words, to balance the books, the government will have to renege on the commitments it has made to future generations.”
The report suggested that “imposing some pricing or charging for some aspects of healthcare” might reduce demand in some areas, “lessening the degree of ‘universality’ of the current model” and “encourage a greater degree of self-funding”.
The think tank recommended deregulating the labour market to raise productivity and encourage people to work later into life.
The IEA’s editorial director Professor Philip Booth, a co-author of the report, said: “Politicians must wake up to the size of the debt time bomb in the UK.
“Older generations have voted themselves benefits that will indebt future generations, meaning crippling tax hikes for our children and grandchildren.
“Very significant spending restraint and reform of entitlements will be required in the next parliament and beyond to get our debt levels back under control.”