Magazine

Go Figure: The doom and gloom calculator

We know we'll pay more for pensions and healthcare in the future, but is there a silver lining, asks Michael Blastland.

How poor will we be in future? Pretty poor if you read the headlines. Health costs, ageing, pensions, debt, you name it, the bills are coming.

So here's a little calculation. It takes a pile of bills projected by the Office for Budgetary Responsibility, adds a few more, and turns them into the sort of cash figures that make more sense to the rest of us.

We'll think in terms of each £100 that we earn and then take away from that the various rising costs projected over the next few decades.

So, start with £100.

Top of the list is healthcare. On the most pessimistic of the OBR's scenarios, this rises fast for 50 years, faster than inflation, so fast in fact that it takes an ever larger slice of our cash. So while in 2011 about £8 of every £100 we have goes on state healthcare, by 2061 this is projected to rise to £15, an extra £7 in every £100.

Next, pensions. Today, the nation spends about £6 in every £100 on state pensions. But we all know that longer life expectancy means this must rise. By 2061, the OBR reckons we will have to spend about another £2 in every £100.

We'll also have to spend more on private and company pensions. Let's take a bleak view of this and say another £5 in every £100, despite retiring later.

Add another £1 estimated by the OBR for social care, mostly to take care of the increasing numbers of elderly who can't look after themselves on their own.

Let's throw in another £2 to repay student debt. A big exaggeration - the whole of tertiary education costs about £1 in every £100 of the nation's income and this isn't changing much, just the way we pay for it. Remember, these are extra costs not current ones. But it is a public concern, so why not?

Interest on the national debt. Though helped by low bond rates at the moment, we're still gloomy and cynical, so let's deduct an extra £2 in every £100.

And let's take another £1 in every £100 to round it up.

So in fifty years time we could be a massive £20 down on every £100 that we earn as a nation.

On £50,000 of income per head, that would be the equivalent of £10,000 of extra costs. At least, that seems to be the way some people see it.

Broke? Doomed? It depends.

For though there's been much written about how heavy the burdens will be in future, cost is only one half of any balance sheet. There is also income, and it makes no sense to talk about one without the other. Would you talk about your costs without thinking about your income? Then why do so many commentators do it to the national finances?

In fact, the OBR does talk about what it thinks the national income will be in future - it's just that few have paid any attention to that bit. The OBR might be wrong. But just out of interest and since, unlike the cost side, this has scarcely been reported elsewhere, what did it say?

It said that as a result of ordinary economic growth of the kind we've seen for the last 50 years averaging a little over 2% a year, we will in the next 50 years, on average, have about three times as much income as we do today, even after inflation.

That turns every £100 in 2011 into £300 into 2061. In other words, even if we do have to pay 20% more of our income to tackle the new challenges, it'll be 20% of a lot more income. Take 20% off £300 and it leaves £240 in place of every £100 we have now.

If that's our grim fate, bring it on. If the OBR is right, our massively impoverished future will in fact be about two and a half times richer in the next 50 years - even after the extra bills are paid.

These calculations could be wrong, but they'd have to be spectacularly wrong to make us genuinely poorer in 50 years time.

Of course, there are qualifications. For example, extra income is not often shared equally. Some will face more of the bills while others grab more of the cash.

And what if the economy doesn't grow as it did before? Well, the figures above show how much leeway there is. The economy could grow far, far slower than we've been used to and still leave money to spare compared with now. The growth could even be shared among a much bigger population and still leave us better off on average.

So why has even a 50-year future been reported so gloomily? Are we extrapolating from misery today and assuming the future - pretty much forever - will be the same? And wasn't our big mistake before the recession to assume that the good times would roll on and the future always be the same?

But the main interest here is that even when we pile on as much misery as we can think of, it's desperately hard - barring environmental apocalypse or such - to make the future poorer than the present.