Magazine article Public Finance

Beyond the Meltdown

Magazine article Public Finance

Beyond the Meltdown

Article excerpt

IT IS HUMAN nature to react quickly to crises while neglecting longer-term but potentially more catastrophic issues. This is certainly the case today across the world, as governments faced with debts and economic stagnation focus almost entirely on getting their economies moving and their borrowing levels down. In the meantime, the crises of the future, caused by major demographic changes, societal changes and costly technological advances in health care, are slowly building up.

The impact of the ageing population is well known and documented. The growing numbers of elderly people, coupled with the disproportionate costs of providing them with health and social care, will affect public finances enormously. And these will have to be paid for by a decreasing proportion of people in employment. This is a truly global phenomenon, as the graph overleaf starkly illustrates. It also shows that in all countries the impact of the financial crisis is dwarfed (to varying degrees) by the longer-term impact of the ageing population.

A large number of societal changes are also having an effect, such as the loss of the nuclear family, increasing levels of female employment and rising numbers of people living alone. A major change is the breakdown of community and social cohesion over the past 20 years, which is steadily resulting in the development of a 'two nations' culture. As several local authority chief executives have told us recently, there are perhaps 150-200 families in their areas whose dysfunctional lifestyles are absorbing a disproportionately large amount of public expenditure from all public agencies. How such a situation can continue in the current financial climate, when core services are being cut, is an issue that cannot be dodged.

Linked to this are the large-scale disparities in income and wealth in the UK, which lead to inequalities in health, education and employment. In The future of socialism, the late Labour Party intellectual and Cabinet minister Anthony Crosland argued that such inequalities could be reduced by distributing the fruits of economic growth more fairly and equally. But how is this to be achieved in an era of nil or little growth?

Scientific and technological developments have always been a driver of demands for public services, particularly in relation to health services. Consider the following: organ transplants, joint replacements, CT and MRI diagnostic scanners and modern chemotherapy. None of these was available 60 years ago but they are now commonplace. Further developments, such as new drugs and gene therapies, are likely to increase health costs further. The assumption has always been that the increasing costs of public services caused by such changes will be financed through increasing economic growth.

Even now, the usual politicians' answer to these future financing problems is that everything will be OK once economic growth gets back to 'normal' - by which they mean an average economic growth rate of 2%-2.5% growth per annum.

However, there are several reasons why this approach might not work, including climate change, depletion of natural resources and changing economic powers.

The Stern Review on the Economics of Climate Change suggested that, without action to control carbon emissions, the overall costs of climate change would be equivalent to a permanent loss of 5% of global GDP. Including a wider range of risks and impacts could increase this to 20% of GDP or more.

Stern believed that stabilising atmospheric carbon levels at 550 parts per million would prevent this level of GDP loss but would require an investment of 1% of GDP, which he felt would be politically acceptable.

There isn't any sign that we are taking the implications of the Stern report seriously. And that might have more significant social and political consequences than we can imagine. Jared Diamond's book Collapse traces catastrophes that have overtaken communities throughout history that are broadly due to failing to address cultural, technological, and social assumptions, in the face of slowly changing environmental circumstances. …

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