Sean O'Grady: The NHS is a religion and we'll all have to pay 'church tithes' to support its existence

Economic Outlook: Immigrants tend to be younger than the indigenous population, and that helps the demographics, crucial for fiscal health
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The Independent Online

As has frequently been observed, the National Health Service is the nearest thing the British have to a religion. I can't recall which Tory politician said that, but it was one of Ken Clarke, Nigel Lawson or Norman Lamont. All served in the Thatcher governments of the 1980s that were widely perceived as being hell bent on slashing the NHS, but where the figures show that real-terms spending increased. That makes the point: even the most hostile of governments is usually forced by sheer political force to hand the cash over to the doctors and nurses.

But, like any religious organisation, the NHS needs its funds.In medieval times the Church imposed a "tithe" – a tenth of the production from a given peasant's land would have to be delivered to the church.

By the middle of the next century the NHS will also demand a tithe in relation to the UK economy. The Office for Budget Responsibility tells us that by 2060 it will consume fully 9.8 per cent of GDP – one pound in every 10 generated by the economy. That's against an expected low point of 7.4 per cent in 2015. The state retirement pension – rather than the public sector pensions for teachers, nurses and so on – is also due to eat up a much bigger proportion of the national cake – from 5.5 per cent in 2015 up to 7.9 per cent 50 years hence.

There's a couple of interesting points here that show how the Government is going about its cuts in a very curious way.

First, public sector pensions, though expensive by any standards, are not, properly speaking "unsustainable" as ministers have sometimes claimed. In fact, they are due to fall as a proportion of national income long term, from2 per cent to 1.4 per cent, the OBR confirming the findings of the Hutton report.

The gross cost may be £1.33 trillion at today's prices, but that is not so large on a half-century view, and is in any case highly sensitive to marginal movements in long- term interest rates (anyone's guess). Thus, the OBR admitted that £260bn of the "increase" in the notional bill for public service pensions since 2010 was purely due to the fall in interest rates. Suffice to say that pubic sector pensions, unfair and unjust as they arguably may be, are a bit irrelevant to fiscal sustainability. They will fall anyway, because of past reforms to them, the current pay freeze on state employees and planned redundancies by 2015.

So why is the Government making such a big fuss about them? And, moreover, why has it decided to ignore the real threats to fiscal sustainability – by ring fencing NHS spending and guaranteeing that the state pension will rise by inflation, earnings or 2.5 per cent, whichever is the greater?

That "triple lock" is extremely welcome to pensioners and future pensioners (ie everyone) but it is expensive. There is a fair case to be made for the fact that, nasty though it was, the Thatcher government's early decision to break the earnings link to the retirement pension in 1980 was one of the major forces in driving down the size of the state by 1997.

Ring fencing the NHS is one thing, but much of the Government's strategy depends on the Health Service finding implausibly large efficiency savings and the rest from its reforms, whatever they may be. As to the importance of this, we have the word of Stephen Nickell, one of the three wise men running the OBR and a distinguished Oxford economist.

"Health service productivity is the biggest single factor on the sustainability of the public finances," he declared last week.

According to the OBR's most pessimistic projections, if the demands on the NHS grow as fast as they have recently, and productivity fails to keep up, as it usually has done, NHS spending will rise so fast that it will push the national debt to over 200 per cent of GDP by 2060 – not just unsustainable, but ruinous.

The policy implications of all this are unpalatable. The next government, most likely a truly Tory-led affair, but applicable to any party, will have to look again at these commitments. The NHS fence will have to be dismantled, if we are not to sacrifice virtually every other public spending programme to its insatiable appetite for resources. It is a cuckoo in the public spending nest. It was Vince Cable, as I have pointed out before, who wisely made this very point before the last election, and he was right (and, as he found to his cost, it meant the painful recreation of the system of student finance). The NHS is so big that ring fencing it creates huge distortions elsewhere, as the Institute for Fiscal Studies has also reported.

After the ring fence is removed, and the NHS has to shrink in real terms, we may then find some really nasty battles breaking out all over the NHS, where the unions are still strong, and where public opinion will still be with them on vicious Tory cuts, as in the 1980s. As I say, unpalatable.

Second, the triple lock around the state pension will need to be unpicked with Houdini-like skill. What the Coalition parties will say about this at the next election, one cannot predict; but if they do not, again, want to be accused of betrayal, they might choose to come clean about what all this is actually costing the nation.

There are only two ways out of all this, both equally difficult: tax rises or lifting the lid on immigration. Tax rises of some kind will be necessary because some of the existing sources of revenues to the Treasury will just dry up. North Sea oil duties are an obvious one; they will disappear by 2023. Tobacco duties will also decline with the trend to less smoking. Greener cars also take the edge of fuel duty increases. Something on the tax side will have to give. Again, I wonder how candid the political parties will be with us about this.

Immigration, the OBR points out, can also help.

I make no apology for returning to this theme in these pages. The sober economists at the OBR agree with me: immigrants tend to be younger than the indigenous populations and that helps the demographics, which are crucial for long-term fiscal health.

Of course, if they come here and stay then eventually they too will become part of an ageing population, requiring yet more immigration to support them, a sort of demographic Ponzi scheme, though that really is a long way away.

Besides, Poles and other eastern Europeans will probably retire home, taking their health and social care needs to eastern Europe. There are few economic problems where immigration isn't part of the answer. Unfashionable, but true.