The financial crisis isn’t the problem – it's expensive old people

First, to clear up a common misconception; our massive debt pile is not a result of the global financial crisis.

The crisis contributed, but you could much more accurately attribute the deficit to increasing spending on healthcare and pensions. That, and the use of debt as ‘the ultimate shock absorber’, according to a new paper from the International Monetary Fund, which reminds us that developed countries like the UK were ratcheting up debt long before the crisis, ‘rising in bad times but not declining much in good times’.

At a time when few can see past the immediate need to cut spending to bring down our debts, the Washington-based bailout fund – among other things – has issued a warning from the leftfield: ‘Healthcare reform will be the fiscal challenge of the 21st century’.

The combined contributors to ageing-related spending, healthcare and pensions, accounted for over 80% of the increase in G7 public spending in the particularly profligate two decades to 1985.

In its paper the IMF dismisses the threat of one of these pressures, pensions, suggesting the challenge seems ‘manageable’. After all, governments, like David Cameron’s coalition in the UK, are making tentative steps to address the challenge of making sure we all have pensions, among them an acceleration of the increase in the state pension age.

‘There has been a great deal of emphasis on pension spending, but much less on the rising trend in health care spending. This is a mistake,’ the IMF report warns.

According to the latest OECD data, total spending on health in the UK as a proportion of GDP was 8.7% in 2008. Our health spending is less than other large European economies and almost half as much as the 16% apportioned for health care in the US, but it has risen consistently since the 1960s.

The increased spending – and current ring-fencing of the NHS budget at the expense of massive cuts elsewhere – reflects the public’s expectation that healthcare will always improve and that the tab for new, expensive, treatments be picked up by the NHS. When the National Institute of Health and Clinical Excellence says that a cancer drug is not cost-effective, there is public outrage.

Long term care is also a costly healthcare burden, and the growing number of elderly means care home funding will continue to be stretched – we can barely pay for the current lot. But long term care or not, we are all particularly expensive to maintain in the last few years of our lives.

The IMF warns that in Europe we are underestimating the rising costs of healthcare owing to a simple assumption in the maths. The US government projects a much greater rise in healthcare spending than the European Commission does (see graph from IMF below). The US takes changes in the relative price of medical services on board, but Europe doesn’t. Technological progress comes at a massive cost and Europe isn’t recognising this in its calculations.