CONSIDERING that health and pensions are by far the biggest activities of the Government, accounting for almost half the £519 billion to be spent by the public sector this year, it is surprising how little argument they seem to be provoking in this election campaign.
The state of public opinion makes the lack of focus on these two great issues all the more striking, despite the brief flurry of interest created over the weekend by the Tories’ unexpected decision to play the costly card of a £1.7 billion handout on pensions tax relief.
Voters see health as by far the biggest issue in this election, mentioned by 44 per cent, according to the MORI polls. Pensions, meanwhile, are easily the biggest economic issue, seen as important by 13 per cent of voters, compared with the 8 per cent who mentioned poverty, unemployment or housing, never mind the 6 per cent who worried about tax.
Why, then, has Labour been so shy about introducing some eye-catching initiatives? And why have the Tories been so reticent in distinguishing their radical pro-market policies from the Labour status quo? The obvious answer is political tactics.
Ever since Aneurin Bevan created the NHS, Conservatives have found health to be a “third-rail issue” in American parlance — touch it and you’re dead. This is why the Tories, after toying with some radical ideas for insurance-based health funding, decided to suppress all debate on this subject by simply promising to spend whatever Labour wants to spend.
This key decision essentially foreclosed any possibility of the Tories offering substantial tax cuts in this election campaign or of presenting their small-government philosophy as a genuine alternative to Labour’s belief in a benign and powerful state.
Pensions are similarly lethal to Labour, mainly because of the disintegration of Britain’s private pensions industry since the end of the 1990s, a disaster widely held to be the result of the £5 billion- a-year “pensions tax” introduced in Gordon Brown’s first Budget.
This may be unfair, since the pensions industry’s demise had more to do with the “contribution holidays” taken by many employers during the bull market of the 1990s and the regulations introduced by Labour and Tory governments, which imposed all sorts of additional obligations, such as inflation-proofing and fair treatment of early leavers, which the pension funds were never designed to meet.
But rightly or wrongly, Labour is now firmly associated with the erosion of private pensions, which is why the Government is trying so hard to remove this issue from the electoral arena, limiting its manifesto promises to a call for “national consensus” and deferring any decisions until after a report from the independent Pensions Commission, conveniently timed for publication well after the election, late this year.
But beyond such political calculations, there are deeper though equally cynical, reasons for the absence of serious debate on health and pensions — which also explains why the two issues of health and pensions are best discussed side by side.
The fact is that pensions and health are the most intractable, indeed insoluble, challenges confronting any modern government. And they are the two subjects that define most sharply the fundamental ideological question that all Britain’s political parties seem desperate to avoid: where should we draw the dividing line between the public and private sectors, between the responsibilities of the individual and the state?
Health and pensions raise these questions because they will inevitably absorb an ever-growing share of Britain’s national income as the population ages and as the elderly become more demanding for an affluent and comfortable lifestyle.
The unavoidable implication is that taxes and public spending will have to rise continuously if the government remains the dominant provider of both pensions and healthcare in the decades ahead. In an ageing society, where the ratio of people over 65 to the working-age population will almost double from 28 per cent today to about 50 per cent in 30 years’ time, expecting the Government to finance both health and pensions will mean an inexorable rise in taxes and a creeping takeover of the whole economy by the state.
That, in turn, will imply the sort of economic sclerosis of the kind we see in many continental countries, where age-related public spending has already risen to the levels that threaten Britain in the coming decades.
Gordon Brown, to his credit, appears to have understood this logic, which is why he has steadfastly refused to match the Tory and Liberal Democrat promises to link increases in the basic state pension to average earnings, rather than retail prices.
Earnings rise about 2.5 per cent faster than prices each year. Over a 30-year period this means that a state pension linked to earnings would end up costing twice as much as one linked to prices. The Chancellor believes — or, more accurately, hopes — that by sticking to the Thatcherite policy of gradually shrinking the basic state pension in relation to average earnings and GDP (as shown in the bottom right chart), he will create enough headroom in the public finances to keep expanding the health service.
The Tories and Lib Dems, by contrast, seem unperturbed by any such scrupulous calculations. Instead, they promise to increase NHS funding and pension spending at the same time.
The lack of restraint over state pensions spending makes little difference to the public finance numbers in the short term, which, against the background of glacial changes in demographics, covers the whole of the next Parliament. But the Tory and Lib Dem pension promises raise a huge question mark over their ability to pay for a government-funded health service in the long term.
The Tories argue that they would do more than Labour to promote private pensions and therefore would have to spend less on means-tested support for the elderly poor.
It is not clear, however, whether the extra tax relief proposed this week by the Tories would really have much impact on the pensions of the very poor.
The Government already spends £19 billion a year on pensions tax relief and it is not clear why another £1.7 billion would encourage the poor to save much more.
The reason why many poor people fail to save for a pension is because they do not have enough money for their daily lives. For millions of families living from hand to mouth, tax incentives make very little difference. The most economical way for the state to provide for their retirement will always be through means-tested benefits of the kind promoted by Mr Brown.
In the long run even the historic compromise effected by the Chancellor — the gradual withdrawal of the state from middle-class pensions provision, in exchange for the Government’s continuing dominance over health — is probably unsustainable.
Towards the end of the forthcoming Parliament, the inexorable growth of government health costs will again start to look unaffordable, even if pensions spending is kept firmly in check. At some point in the next decade, Britain will have to re-examine the concept of a health service funded exclusively through taxes.
But that is a debate every party is determined to delay until the next election — or the one after.
LABOUR
CONSERVATIVES
LIBERAL DEMOCRATS
Higher pensions for over-75s, financed by administrative cuts
