Transcript Figure 1 - Age distribution of NHS spending (estimates for

Long term public spending trends*
John Hawksworth
Head of Macroeconomics
PricewaterhouseCoopers
March 2006
*connectedthinking
Agenda
Methodology and key assumptions
Total public spending projections
Focus on health spending
Summary and conclusions
6 March 2006
PricewaterhouseCoopers LLP
How do you project long-term public spending as % of GDP?
Start with GAD population projections in five year age bands
Assume trend labour productivity growth = 2% per annum
Assume plausible path for employment rates by age band/gender
Derive implied trend GDP growth profile (c.2.25% pa to 2014/15;
then c.2% per annum on average over next 40 years)
Input estimates of spending as % of GDP per capita in base year
for health, long-term care and education by age band
Make plausible assumptions on trend real growth in unit costs for
each of these three spending categories (c.2.5%/2%/2%)
Use separate model to project state pension costs
6 March 2006
PricewaterhouseCoopers LLP
Summary of long term PwC age-related public spending
projections
% of GDP
30
25
Public service pensions
Education
State pensions
LT care
NHS
20
15
10
5
0
4/
0
20
5
5
/1
4
01
2
5
/2
4
2
20
2
35
/
4
3
0
5
2
/4
4
04
5
/5
4
05
2
Source: PwC main scenario projections (except Treasury for public service pensions)
6 March 2006
PricewaterhouseCoopers LLP
Comparison of long term PwC and HM Treasury public spending
projections
% of GDP
48
47
46
45
44
43
42
41
40
39
38
PwC main scenario
Treasury
2004/5 2014/15 2024/25 2034/35 2044/45 2054/55
Source: PwC main scenario projections using Treasury projections for public service
pensions and other spending, Treasury long-term public finance report 2005
PricewaterhouseCoopers LLP
6 March 2006
PwC and HMT projections very similar except for health
spending (though even there trends are broadly comparable)
% of GDP
12
10
NHS (PwC)
8
NHS (HMT)
6
State pensions (HMT)
4
2
State pensions (PwC)
0
Public service pensions
(HMT)
/5
4
0
0
2
5
/1
4
01
2
5
2
/2
4
02
5
2
/3
4
03
5
2
/4
4
04
/5
4
05
5
2
Source: PwC main scenario, HMT long-term public finance report
Note: education spending projections are very similar
PricewaterhouseCoopers LLP
6 March 2006
Recent projections for UK public spending on pensions, health and
long-term care
% of GDP increase over
period shown
Health and long term
care only
Pensions, health and
long-term care
Treasury (Dec 2005):
2004/5 to 2054/55
+3.3
+5.5
PwC (March 2006):
2004/5 to 2054/55
+4.7
+6.8
+2.8-5.6*
N/A
+2.6
+4.6
OECD (Feb 2006): 2005
to 2050
EU EPC (Feb 2006):
2004 to 2050
*Two OECD scenarios: ‘cost containment’ and ‘cost pressures’
PricewaterhouseCoopers LLP
6 March 2006
What drives NHS spending in long run?
Any additional ‘catch-up’ over next 5 years (Wanless: 4.4-5.6%
real growth; we assume bottom end of this range)
Pure age effects - more older people -> higher costs (survivors)
Number of deaths -> change in death-related costs
Offset from healthy ageing -> perhaps c.50% of pure age costs
Non-demographic factors:
- Income elasticity of demand > 1 (superior good)
- Technological advances and relative price effects
6 March 2006
PricewaterhouseCoopers LLP
NHS spending as a share of national income: 1949/50 to 2004/5
Gross spending (% of GDP)
8
7
6
5
4
3
2
1
0
9 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03
4
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20
Source: PwC calculations based on data from ONS, Department of Health and IFS
6 March 2006
PricewaterhouseCoopers LLP
Decomposing UK public health spending growth: 1981-2002
(% average real growth per capita per annum)
Total UK public health spending growth per capita: 3.4%
of which:
Age effect: 0.2%
Income effect: 2.3%*
Other effects (residual): 0.9%
Source: OECD (2006, Table 2.1)
*Assuming income elasticity of health spending = 1
6 March 2006
PricewaterhouseCoopers LLP
Age distribution of NHS spending (estimates for 2004/5)
% of GDP per capita
35
30
25
20
15
10
5
0
Age 0-4* Age 5-14 Age15-44 Age 45-64 Age 65-74 Age 75-84 Age 85+
*Includes cost of births
PricewaterhouseCoopers LLP
Source: PwC assumptions based on UK government estimates for 2000 in
EPC report scaled up to 2004/5 values to match gross NHS spending plans
6 March 2006
Alternative estimates of age structure effects on future NHS
spending – may be significantly greater than historic effects
Change relative to base year* (% of GDP)
1.8
1.6
1.4
PwC main scenario
with health adjustment
OECD pure ageing +
death cost effects
EPC with health
adjustment
1.2
1
0.8
0.6
0.4
0.2
0
2025
2050
*Base year is 2004/5 for PwC, 2005 for OECD and 2004 for EPC;
EPC estimate for 2025 is based on extrapolating between 2010 and 2030 estimates.
Source: PwC, OECD (2006), EPC(2006); OECD figures exclude adjustment for ‘healthy ageing’
PricewaterhouseCoopers LLP
6 March 2006
Estimated elasticity of UK health care spending per capita to
GDP per capita
1992-2002
1982-2002
1972-2002
Total health
spending
1.39
1.49
1.73
Public health
spending only
1.33
1.40
1.63
Source: OECD Health Data 2005
Our base case assumption: income elasticity = 1.2
HM Treasury assumption: income elasticity = 1
6 March 2006
PricewaterhouseCoopers LLP
Alternative estimates of income effects on NHS spending
Change relative to 2004/5 level (% of GDP)
3
2.5
2
Low elasticity
Main scenario
High elasticity
1.5
1
0.5
0
2014/15
2024/25
2034/35
2044/45
2054/55
Source: PwC estimates with income elasticities in a range of 1.1-1.3
PricewaterhouseCoopers LLP
6 March 2006
What drives NHS spending growth in our main scenario?
Total projected increase by 2054/55: +4.1% of GDP
of which:
Catch up effect by 2012/13: +1.1% of GDP
Ageing effect after health adjustment: +1.3% of GDP
Income elasticity/other effects: +1.7% of GDP
6 March 2006
PricewaterhouseCoopers LLP
Alternative PwC composite scenarios for total NHS spending
% of GDP
14
13
12
11
High scenario
Main scenario
Low scenario
10
9
8
7
6
5
2004/5 2014/15 2024/25 2034/35 2044/45 2054/55
Source: PwC projections starting from HM Treasury estimate for 2004/5
PricewaterhouseCoopers LLP
6 March 2006
Alternative PwC scenarios for total NHS spending vs Treasury
projections
% of GDP
14
13
12
11
High scenario
Main scenario
Low scenario
Treasury
10
9
8
7
6
5
2004/5 2014/15 2024/25 2034/35 2044/45 2054/55
Source: PwC projections starting from HM Treasury estimate for 2004/5
PricewaterhouseCoopers LLP
6 March 2006
Summary and key issues
PwC and Treasury projections similar apart from NHS spending
- explained by our inclusion of non-demographic cost pressures
But: both sets of projections see rise in total public spending to
around 45-47% of GDP by 2054/55 (c.42% at present)
Higher longevity might increase this; higher employment rates or
healthier lifestyles might reduce the pressure on future taxpayers
Raises issues as to:
- Potential pressure on NHS model if unit costs rise in line with
historic trends: how can these cost pressures be mitigated?
- Are there other major areas of public spending that can be
reduced as a share of GDP?
- Balance between private and public spending?
6 March 2006
PricewaterhouseCoopers LLP