Deeper - Much Deeper - In Debt

TUESDAY, OCTOBER 19, 2010

Deeper - Much Deeper - In Debt

Scary

Tyler's long-promised report on the Real National Debt has finally made it to publication (download here and see TPA blog here). As BOM readers will know, the Real National Debt is the debt including all those off-balance sheet Enron items like public sector pensions, and the key points as follows:

• At the end of 2009-10 the real national debt stood at £7.9 trillion, over £300,000 for every single household in Britain
• During the last decade debt has more than tripled, soaring from 230 per cent of GDP (£2.3 trillion) up to 560 per cent of GDP (£7.9 trillion)
• Official national debt (quoted by the Chancellor in his budget) hugely underestimates taxpayer liabilities
• Relative to GDP this is by far the biggest national debt we have ever had since records began

And here's the summary chart with the accompanying key:

As that crotchety old guy on the accompanying vid* reminds us, it's pretty scary stuff.

Well, that is to say, you and I think it's pretty scary. Amazingly, despite the scale of these figures, there are still those who argue that we needn’t worry too much. They argue that we can take time to address the problem, something is bound to turn up when the economy recovers, and that anyway most of this debt isn’t real, like say credit card debt. 

In tough times that's a very seductive line, so we need to be clear why it’s wrong.

First, these debts are much more than a few dry entries in some dusty accounting ledger. They represent a real commitment on taxpayers to make real payments in future years. 

And lest anyone imagine those payments won’t come due for ages, and that we can safely shrug and leave the pain to our grandchildren, it’s important to understand that annual servicing costs are already increasing alarmingly. By the middle of this present decade the annual cost of debt interest plus pension payments plus other debt servicing will be approaching £200 billion, or £8000 per annum for every family (see this blog). 

Second, although economic growth will certainly help ease the strain, the rapidly mounting cost of debt servicing means that we will need a high growth rate just to keep our heads above water. Unfortunately, from where we are today a sustained period of high growth doesn’t look very likely.

Third, pension liabilities are just as much debt as government borrowing in the bond market. For sure, the government could renege on its accumulated obligations to pensioners, just as it could default on its market debt. But there would be consequences (cf La Belle France), and the present government shows no signs of doing so. On the contrary, it has promised to re-link the basic state pension to average earnings.

Finally, while it is true that our nationalised banks have assets to back their debts, nobody can be sure quite how much those assets are actually worth. Taxpayers are effectively on the line for the full amount of the debt, and should not assume they can rely on the banks’ assets for support (as Irish taxpayers have recently discovered).

A real National Debt of six times our annual income is insupportable. It represents a mounting burden on taxpayers for years to come, and a colossal drag on future economic growth. In one way or another, government must reduce it.

Which is why Wednesday’s spending announcements are so important. We need to see a convincing plan for delivering the fiscal restraint promised in June’s Emergency Budget. 

But that is only the start. 

Spending needs to be held down for at least a decade, so that the annual budget deficit becomes an annual surplus, and we start to pay down the debt – we are still a long way from that. 

As we've blogged many times, we need to flog our nationalised banks soonest. 

And in addition, there needs to be a much more fundamental reform of government pensions, both public sector and state. With life expectancy increasing in leaps and bounds, the age at which people can draw their pension has to be increased soon, almost certainly to 70. 

*Footnote. Yes, there is a vid featuring some old bloke Tyler doesn't recognise. But for the record, here it is:

MONDAY, OCTOBER 18, 2010

So What Happened To Those 25% Cuts?

It turns out she had it easy

As we blogged over the weekend, the noises off suggest that all that macho talk of 25% spending cuts was way off the mark. 

We learned in June that George's cuts were never going to deliver more than a 4% overall reduction in real-terms spending over 5 years (ie a 9% increase in cash spend against 13% projected inflation). And although the ill-advised ringfence around the NHS and overseas aid budgets suggested that cuts in other departments might still be much higher, it now seems that even those cuts have been trimmed back. The big spending departments seem to have diverted any real pain into the welfare area. 

Can that be right?

Sure, we know the difficulties. We know that even Mrs T never actually managed to cut overall spending - she only managed to restrain its growth. 

But Mrs T was not wrestling with the kind of horrific government deficits and debtwe currently face. Even in the annus horribilis of 1980-81, public sector net borrowing was only 4.8% of GDP, with public sector net debt a mere 46%. Compare her stroll in the park with our current predicament, where we have government borrowing over 10% of GDP, and debt already through 60% and rising fast.

In the circs, you have to wonder why we're not sticking with the original idea of 25% cuts. Surely after those huge budget increases under Brown, all departments must have a great wobbling midriff of blubber just crying out for emergency liposuction.  

Now a helpful new report from Policy Exchange gives us a fix on that blubber, at least in a subset of the spending departments.

Policy Exchange examined spending in six non-ringfenced departments to see how easy it would be to make overall 25% cuts without damaging vital services. And it turns out it would be dead easy, or in the words of lead author Andrew Lilico:

“From our report, a natural conclusion to draw is that it would be relatively straightforward to achieve savings of around 25% across most departments. Indeed, it is perhaps surprising that there is so much ‘fat’ in the system that cuts on this scale can really be made in so many areas so straightforwardly."

Which in terms of spending cuts is rather encouraging. 

But the report also makes the very good point that it would be even easier to make cuts without damaging services if the ringfenced areas were also made to take their share. PolEx's head Neil O'Brien says:

“There is a lot of waste and unproductive activity in the areas we examined. Yet these are not the areas which have seen the largest increases in spending in recent years. In the areas where there was a real flash flood of spending we might expect even greater potential to make effective savings.”

The overall conclusion is familiar in the sense that it would have been a lot better not to have set up those ringfences in the first place. But by looking at specific areas in detail, this report tells us the ringfenced areas offer a deal of scope for Cuts II, sometime around 2013.

PS Tomorrow Tyler's long promised report on the Real National Debt hits the newsstands... well, it comes out, anyway, and we'll take a look at the main findings.