Generational Accounting in the UK

Abstract

This paper presents the ®rst set of generational accounts for the United Kingdom. We ®nd that under our baseline scenario, in which pensions are price indexed and health expenditure grows modestly, the imbalance in UK generational policy is small when compared with other leading industrial countries like the United States, Japan, and Germany. However, under an alternative policy scenario, where all social bene®ts are wage-indexed and health care spending is increased, there is a larger ®scal bill left for future generations to pay. In this case, achieving generational balance would require much stronger medicine.The rapid ageing of population and the existence of large unfunded social security systems in most of the industrialised countries have made the traditional indicators of ®scal policy (the government de®cit and debt) increasingly out of line with the long-term stance of the public ®nances.New methods have been proposed that try to capture the intertemporal dimension of many of the current ®scal measures, and to evaluate their effect on both the public sector solvency and the redistribution of resources between generations. This in turn may help in understanding how ®scal policies are actually affecting savings, investments and growth.Generational accounting is one of these new methods of long-term ®scal planning and analysis. 1 It seeks to answer the following closely related questions. First, how large a ®scal burden does current policy imply for future generations? Second, is ®scal policy sustainable without major additional sacri®ces on the part of current or future generations or major cutbacks in government purchases? Third, what alternative policies would suf®ce to

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