This presentation was made by Mirko Lichetta, United Kingdom, at the 6th Meeting of the Joint OECD DELSA-GOV Network on Fiscal Sustainability of Health Systems, held at the OECD Conference Centre, Paris, on 18-19 September 2017

1. Fiscal sustainability and public spending on
health
Mirko Licchetta
6th OECD Joint Network on Fiscal Sustainability of Health
Systems
18 September 2017

2. Context: role of the OBR
“examine and report on the sustainability of the public finances"
Five key roles
• Produce five-year forecasts for economy and public finances
• Judge progress towards government’s targets
• Assess long-term sustainability of public finances
• Evaluation of fiscal risks
• Scrutinise costing of tax and welfare policy measures

3. Outline
• Modelling public finances in the medium and long term
• The role of demography
• Non-demographic drivers of health spending
• Assessing long-term fiscal sustainability in the 2017 Fiscal
sustainability report (FSR)
• Fiscal Risks Report (2017)

4. Medium term forecast
• Next five years (to 2021-22)
• Captures the cyclical state of the economy
• Defined Government policy: in line with the
Spending Review (to 2019-20) and latest top-
down policy decisions
• Bottom up receipts forecast
• Ignore political risk but not delivery risk
• Judge if government has a ‘better than 50%’
chance of meeting its fiscal targets

5. Long-term projections
• Next 50 years (to 2066-67)
• Projections, not forecasts
• Output gap closed
• Unchanged Government policy beyond
the medium-term forecast (2021-22)
• Functional definitions of public spending
on health, education, etc
• Receipts driven by NGDP and ageing

6. Why ageing matters: in one picture
0
5
10
15
20
25
30
35
1 11 21 31 41 51 61 71 81 91 101+
Receipts/spendingperheadin2011
rescaledto2021-22(£thousand)
Age
Total tax revenue
Total spending
Source: OBRSource: OBR

7. The changing age distribution
24.4 18.8 17.5
63.7
63.1
56.4
11.3
15.6
19.1
0.7 2.4
7.1
0
10
20
30
40
50
60
70
80
90
100
1961 2016 2066
PercentofUKpopulation
85+
65-84
16-64
0-15
Note: 1961 is England and Wales only. Source: ONS

8. 0 20 40 60 80
India
Colombia
Brazil
China
Cyprus
Russia
Iceland
USA
New Zealand
Canada
United Kingdom
Spain
France
Germany
Italy
Japan
0 20 40 60 80
India
Russia
USA
New Zealand
United Kingdom
Colombia
France
Canada
Brazil
Iceland
Cyprus
China
Germany
Spain
Italy
Japan
The rising dependency ratio
2015 2065
Number of people aged 65+ as a per cent of number aged 15-64

9. Health spending by age
0
2
4
6
8
10
12
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96101+
£thousand(2020-21prices)
Age
Capital spending
Pharmaceutical services
Family health services (excluding drugs)
Hospital and community health services
Total health spending
Source: OBR

10. But it is not just about ageing
Licchetta and Stelmach (2016), Fiscal sustainability and public spending on health, OBR WP No.9 also on VoxEU

11. 0
1
2
3
4
5
UK US Italy Japan Germany
Averageannualgrowthbetween
1995and2009(percent)
Other cost pressures
Income
Demographics
Source: OECD
Drivers of public health spending

12. Income effect
Change between 2000-2015

13. Other cost pressures
• Increasing relative health care costs
– Health care is relatively labour intensive. Harder to generate productivity
improvements but wages have to keep up with the rest of the economy
• Technological change
– Even cheaper technologies may increase spending
• Chronic conditions and multi-morbidity
– Thanks to ageing and lifestyle. King’s Fund says mental health costs (inc dementia)
will rise nearly 50% from 2007 to 2026.

14. Productivity growth in healthcare
100
105
110
115
120
125
130
1997 1999 2001 2003 2005 2007 2009 2011 2013
1997=100
Whole economy
Health care
Source: ONS

15. Surgery for heart disease
0
10
20
30
40
50
60
70
80
90
100
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Thousandsofprocedures
Coronary artery bypass surgery (CABG)
Percutaneous coronary interventions (PCI)
Source: British Heart Foundation

16. Pressures in the NHS
0
1
2
3
4
5
6
Prescribing
services
Specialised
services
Community
services
Acute
services
Continuing
care
services
GP services Mental
health
services
Total
primary
care
Total
secondary
care
Percent
Demographic pressure Non-demographic pressure
Source: NHS England (2016)

17. Projected health spending
EFO
forecast
FSRprojection
0
2
4
6
8
10
12
14
16
2016-17 2026-27 2036-37 2046-47 2056-57 2066-67
PercentofGDP
Central
No other cost pressures
Source: OBR

18. EFO
forecast FSRprojection
-20
-10
0
10
20
30
40
50
60
2016-17 2026-27 2036-37 2046-47 2056-57 2066-67
PercentofGDP
Public sector net borrowing
Total managed expenditure
Public sector current receipts
Source: OBR
The public finances: big picture

19. Public debt sensitivities (1)

20. Public debt sensitivities (2)
Considerable uncertainty around 50 year projections
Outlook for debt would be worse if:
– Other cost pressure rise faster than in central projection (e.g. health
spending had to rise to offset weak productivity growth)
– Population structure older
– Primary surplus at end of EFO forecast smaller
– Long run interest rates higher relative to long run growth rates
Higher net migration would improve outlook as immigrants more likely to be of
working age

21. Achieving sustainability
Satisfy ‘inter-temporal budget constraint’
• Permanent tightening of 7.0% of GDP from 2022-23
• Up from 1.9% in 2015 FSR (6.5% on a like-for-like basis)
Fiscal gap: PSND of 40% of GDP in 2066-67
• Permanent tightening of 4.3 % of GDP from 2022-23 or 1.5% of
GDP each decade in central scenario

22. Timing the response: decade by decade
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
16
2022-23 2032-33 2042-43 2052-53 2062-63
PercentofGDP
PercentofGDP
Required adjustment (LHS)
PSND (RHS)

23. Fiscal Risks Report
IMF (2017), “Stressing the Public Finances
– the UK Raises the Bar”, PFM Blog
• macroeconomic risks
• financial sector risks
• specific revenue risks
• specific non-interest expenditure risks
• balance sheet
• debt interest spending and its
relationship with economic growth
• illustrative fiscal stress test

24. Sources of risk to fiscal sustainability

25. Conclusion
• Substantial fiscal challenge from rising health care costs over the
longer term.
• Significant population ageing expected
• Non-demographic pressures likely to continue raising health
spending
• Sensitivity analysis vital given the scale of uncertainty
• Long-term outlook unsustainable without policy change.

26. Questions?