Sean O'Grady: Population rise gives India the edge over one-child China

Economic View

One of the more disturbing realities facing the nation this festive season is that the cuts aren't just for Christmas – they're for life.

Face it. Your local library will never reopen; VAT will stick at 20 per cent for ages; higher tuition fees are here to stay. Indeed, I would guess that they could quite conceivably go beyond £9,000 a year, in a second coalition, or Conservative, term equipped with a bigger parliamentary majority.

Complete marketisation of fees might not be practicable, on the grounds, for example that the nation would be left with no doctors if it cost students hundreds of thousands to train. But there is plenty of room for the more rewarding courses (in salary terms) to grow still more expensive. Before any students get ready to push unpleasant parcels through my letterbox, I must stress that I'm not advocating this policy, merely pointing it out. Sadly, even if the parties promise to cap them at that level, who would believe them? Short of the NUS fielding its own candidates in student strongholds, I don't know how they could be guaranteed as reliable allies in Parliament. Even then, it would need young people to remember to register to vote. Pretty hopeless, really.

In a "normal" recovery, what usually happens is that, after the slump, public spending gradually creeps up again as tax revenues grow. This is no normal recovery. Output won't get back to its 2008 levels before 2012, and tax revenues will take even longer, given the UK's past reliance on financial services and property to boost tax revenues, neither of which may prove as stellar as they did in the go-go years. So you can see where the drag on the public finances is coming from.

And even when the economy does revert to normal, there are serious long-term pressures on public finances and the wider economy from our ageing population, with the costs and burdens that follow from that. As we get older, we make more demands on social security (pensions and disability payments) andthe NHS (new hips), and we pay less tax. We've known that for years. What is novel is the possibility that the coalition may have exacerbated these difficult trends with two "unforced" errors.

The generous treatment of pensions though the restoration of the earnings link and preservation of perks from bus passes to free TV licences will prove expensive in the longer term. One of the main ways the last Conservative government gradually shrank the size of the state was to peg pensions to prices rather than earnings (earnings necessarily go up in line with the economy and in real terms, while prices do not).

The other coalition error is to ring-fence NHS spending. In a world of expensive new drugs and medical marvels and with more demands from older citizens, the Government will be lucky to get away with the NHS budgets it has set. A more sensible approach might have been to ask the NHS to make some additional sacrifices to avoid the grotesque distortions seen in other areas – the 80 per cent cut in university teaching budgets springs to mind. I merely note at this juncture that Vince Cable used to make this precise point while in opposition. I might also add that a better-educated workforce will be more able to pay for better healthcare in the decades to come. Given that we'll have so few youngsters, we might as well make the most of their education and skills training. This is patently the looming political power of the grey vote at work; and they're not that bothered about tuition fees.

Greying Britain is also a problem because competing economies have a more promising supply of energetic younger workers coming on stream. So as a nation making our living in the world, and thus the money to spend on public services, economic life is getting tougher. The main threat may surprise you. While better placed than some of our peers in the advanced world, we are at a distinct disadvantage compared to the emerging economies, which are younger and have less well developed health systems and welfare states – thus lower tax bills and government borrowings. So the scope for us to return to our high-spending ways is getting pretty cramped. According to Merrill Lynch, the really worrying case in the West is the US, and one can only hope that President Obama's healthcare reforms will help matters.

The winner, maybe surprisingly, is India. Note that she has both the best demographic trends and the lowest expenditure on health as a proportion of GDP among these competing powers. That's not great if you're a sick Indian, but it does offer the country an impressive competitive advantage. India is today the "youngest" of the major economies and Japan the oldest; according to the IMF, India will still be the youngest in 2040, and Japan not just old but ancient. I'm not quite sure how the Japanese will fund their government deficit once today's high-saving workers retire and no-one's left in the factories and offices. If Japan has to offer more interest to get foreigners to take their bonds, then the interest bill on a debt running at 200 per cent of GDP may well send the world's second-largest economy as bust as Greece is today. Best not to dwell on that, eh?

China is the shocker. Some of us have long been Sino-sceptics, worried about her failure to liberalise markets properly, the grotesquely undervalued exchange rate, insanely unproductive investment on prestige projects, weak rule of law, environmental degradation and, of course, absence of democracy. On most of those points, India has the edge over her northern neighbour and with it a better-balanced economy. India also has better demographics, as you see in the charts. China, partly because of the so-called one-child policy, will age remarkably quickly. That the Chinese will have almost as tough a time as we do at keeping up with India tells us all you need to know about who the real economic superpower will be in 2040 – and why our students will never see a properly free education again.

Come over to the UK Bono, the tax temperature is lovely...or it could be

A short note here on the passing of one of Ireland's minor national institutions – the artists' exemption from income tax. The financial crisis and emergency budget have left it withered at ¤40,000 (£33,000) a year, down from €¤250,000 – not that much for the average, internationally renowned poet or singer-songwriter.

Over the past 30 years, writers such as Irvine Welsh, D B C Pierre and Frederick Forsyth have moved, at least for a time, to Ireland to enjoy the inspirational landscape and people, as well as the fiscal benefits. These may also have persuaded the likes of U2, Enya and Seamus Heaney to remain in the country. The concession goes back to 1969, and was the product of that most fertile of Irish political brains, Charles Haughey. Perhaps he sought to add a few poets and painters to a land "bright with cosy homesteads ... and the laughter of happy maidens", as Eamon de Valera famously put it on St Patrick's Day 1943. Anyway, this generous tax break will not stay for much longer, although the archetypal artist in the garret earning a few euros from his muse will still be protected in the new, more austere Ireland. It remains a more efficient system than offering grants and subsidies, because only if saleable art is produced does the allowance kick in. Harder times may even spark some exciting new work.

But, just as Ireland's ultra-low corporation tax – retained against all the odds – has helped it to tempt some of our big companies to Dublin, at least in HQ terms, one thought occurs to me. Given the commitment of the Chancellor, George Osborne, to the creative industries, highlighted in the recent growth paper, might it not be a good moment to offer a tax break to artists to settle in Britain? A warm welcome awaits Bono, and think what a wonderful guest list it would make for a No 11 party.