By Claire West

Future governments will have to find as much as £40 billion of additional savings by cutting vital public services if state pension spending is not capped.

A Policy Exchange paper, written by former Treasury official Matthew Oakley, argues that over the next 50 years, much of the upward pressure on government spending will come from an ageing population, with state pension costs alone rising from 5.6% of GDP in 2016/2017 to 8.3% in 2061/2062, equivalent to some £40 billion in today’s prices.

If the size of the state returns to its recent steady state of around 40% of GDP or below, Annual Managed Expenditure (AME) - spending that falls outside departmental control - will need to be controlled. AME makes up 50.8% of government expenditure - £379 billion for 2013/14. This is set to rise to 56% by 2017/18. The main components are benefits (working age and pensioner), tax credits and debt interest payments.

The paper argues that the Chancellor should include a cap on AME spending in the Spending Review, which includes the state pension. Without such a cap, politicians will need to make deeper cuts to public services like education, childcare and health.

Matthew Oakley, “If Britain is tame its public debt and constrain growth in the state, welfare spending must be controlled. It has risen from by 133% as a proportion of GDP in the last 50 years. This makes a cap on Annual Managed Expenditure essential. But it has to include the full range of benefits, including pensioner benefits and the state pension. Without this, any proposed cap would be meaningless and fail to recognise the real drivers of rising costs. It’s time for an honest conversation with the public.”