Business

Subsidising by numbers

Pensioner Eric Harvey protests outside BBC headquarters in Belfast over plans to cut free TV licences for over-75s. Picture by Mal McCann.
Pensioner Eric Harvey protests outside BBC headquarters in Belfast over plans to cut free TV licences for over-75s. Picture by Mal McCann. Pensioner Eric Harvey protests outside BBC headquarters in Belfast over plans to cut free TV licences for over-75s. Picture by Mal McCann.

IMAGINE you are a Dragons’ Den judge. The CEO of (a fictional) ‘Grey Enterprises’ is pitching for investment to enable further expansion in its consumer goods business. The firm’s customer base (the over 65s) has grown by one-quarter over the last decade with one in six of the Northern Ireland population using the product.

Robust growth for the next 10 to 20 years is not so much projected as guaranteed. One in five people are expected to need Grey Enterprises’ products by 2028 with demand rising to one in four by 2044. Furthermore, the target market is underwritten by a range of long-term government guarantees which mitigate against risk and uncertainty.

Following the brief pitch all of the dragons are likely to be keen to invest in this ‘no-brainer’.

With the number of pensioners rising so significantly in Northern Ireland, the ‘grey market’ and the ‘grey pound’ represent an increasingly lucrative opportunity for businesses.

Now consider that you are not a private business, but a public sector provider of services to this client base. No fees and charges are allowed. As a result, it is a case of quids out rather than quids in! Northern Ireland’s ageing population is a potential boon for businesses, but a ticking timebomb for the public finances.

This issue was recently brought to the fore with the TV licences for over-75s. Last month the BBC announced that it would be scrapping the free TV licences for up to 3.7 million people from 2020. Instead, a form of means testing will be introduced whereby only low-income households in receipt of pension credit will be eligible. This new scheme will cost about one-third of the £745m for the existing arrangement. The latter would account for one-fifth of the BBC’s overall budget.

Public opinion has been divided on these plans with outrage in many quarters. The BBC chairman described it as “the fairest and best outcome”. So is it?

Given the demographic realities of an ageing population, the BBC faced the challenge that this open-ended subsidy would account for an ever increasing share of their budget. At the same time younger (paying) viewers of the BBC are expected to continue to drop off.

Let’s look at the demographic pressures from a local perspective. When free TV licences were introduced in 2000 the number of over-75s in Northern Ireland stood at 99,000 or one in 16. By 2018 the corresponding figure was 140,000 – a rise of 41 per cent. By 2028 this figure will increase by another third to 186,000 with one in 10 of Northern Ireland’s population eligible for a free licence. Another decade (2038) takes the figure up to one in eight.

That’s just the demographics. What about need? Is it still justified?

It is perhaps worth returning to the original context of the free TV licence. It was introduced by Gordon Brown in 2000 as part of a package of measures aimed at tackling pensioner poverty. Other initiatives followed such as the pension triple lock guarantee (2010), whereby the basic state pension would rise by a minimum of either 2.5 per cent, the rate of inflation or average earnings, whichever is highest.

In 2000 the incomes of the over 75s were 20 per cent behind the rest of the population. Today, according to the Institute for Fiscal Studies (IFS) that gap has narrowed to just 8 per cent. Significantly, however, incomes in this age-group are above working-age families with children and households where the oldest person is under the age of 34. In 2000, the median incomes for these two groups were respectively 9 per cent and 10 per cent higher than the over 75s. By 2016, their average incomes were respectively 8 per cent and 7 per cent below the average income for the over 75s. The latter also have lower poverty rates than the under 75s and have the highest rates of home-ownership.

Younger generations bore the brunt of the last recession and the fiscal austerity that followed. This led to a collapse in rates of home-ownership that has only started to recover. While pensioner benefits were protected, a range of working-age benefits have been cut, capped or means tested. For example, child benefit is means tested and now only applies to the first two children.

The end of the universal free TV licence for over-75s is significant and potentially the tip of the iceberg for reviewing similar subsidies / public spending for the elderly.

Free public transport is another policy being challenged by the ageing population. Again it was primarily a measure to tackle pensioner poverty. Northern Ireland introduced it in 2001 for pensioners aged over 65. Prior to 2001, the over-65s were only eligible for half-priced fares. In 2008 the Stormont Executive lowered the age-limit to 60 years, increasing the numbers of people eligible from 248,000 to 339,000 – a rise of 37 per cent. By 2018, the number of potential beneficiaries increased by a further 73,000 (+22 per cent). By 2028 an *additional* 108,000 over-60s will be entitled to this freebie making the total number eligible some 520,000.

Since the free public transport subsidy for pensioners was introduced in 2001 the percentage of the population eligible has increased from 13 per cent to 22 per cent in 2018. Assuming the same policy remains, within five years it will rise to one in four and to one in three by 2058. That policy is completely unsustainable and given the lack of means testing, the beneficiaries of this subsidy are on average better off than most of those paying full fares!

If only Northern Ireland could increase its tax revenue base as fast as the numbers entitled to subsidies.

Devolution in Northern Ireland was characterised by introducing fiscal giveaways (free prescription charges, public transport etc). As has been highlighted above, the costs of these are spiralling and the justification for them needs to be reassessed.

The challenges facing the UK and Northern Ireland’s ageing population are huge. Back in 2015, it was noted that 42 per cent of the total Health and Social Care budget in Northern Ireland went on pensioners. With the latter set to soar, so will the budgets.

Last month the Department for Health’s top civil servant Richard Pengelley highlighted that Northern Ireland’s health service funding model is unsustainable. "At the moment to run the same service this year as we did last year and next year, it's about 6 per cent increase per annum….If we continue on that trajectory, within about 20 years the health service will need virtually all the money that's available to the Executive."

Taking back subsidies and giveaways will have to happen as our public finances cannot continue to write cheques that our demographics cannot cash. Free public transport and TV licences are the low hanging fruit.

:: Richard Ramsey is the Ulster Bank regional chief economist