by Jagadeesh Gokhale
Institute of Economic Affairs
March 25, 2014
Europe and the United States will soon begin to encounter unprecedented fiscal constraints. Federal debt as a percentage of GDP more than doubled between 2000 and 2012, nearing 100 percent. An ageing population alone does not create greater government indebtedness as long as each generation sets aside adequate funds to meet their own future pensions and health-care costs. In contrast, Western governments have developed unfunded social insurance programmes that the taxes of the working-age population fund. This means that an ageing population leads to ?rising expenditures that require increasing taxes on the young. In the UK, total spending would have to be cut by more than one quarter or health and social protection expenditure by around one half compared with the level implied by current policy if the UK is to avoid tax increases and all spending is to be met out of tax revenue in the long run.

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