Facing Up To The Doomsday Machine

MONDAY, NOVEMBER 29, 2010

Facing Up To The Doomsday Machine

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:

"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."

Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some realdamage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George(a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

SUNDAY, NOVEMBER 28, 2010

All A Question Of Breeding

Not everyone can have the Major's breeding

No sooner had the Tylers returned from the frozen wastes of Swindon, the Major came steaming round. He simply cannot believe the way Lord Flight was slapped down over his "perfectly sensible remarks re breeding".

"I mean everyone knows the socialists have landed us with a huge problem. Everyone knows it's insane to reward feckless teenage girls for having kids they can't afford to support, and won't bring up properly. Think of all the problems we're storing up - well, no, think of all the problems we already have! Hideous costs, disrupted classrooms, vandalism, drugs, muggings, obesity, yet more pregnant teenagers, prisons already full up... gah! It is mad, literally mad, to encourage breeding among the dregs of society. We should be working to prevent it -by all means possible!"

His reddened face had contorted alarmingly. "Down at the bottom, having kids has become a career option! Yet when anyone talks about it in public, they got taken out and shot!" A finger jabbed towards Tyler. "And that's because of people like you! Too squeamish to face the facts! Too namby-pamby to speak up. You make me sick!"

"Well, thank you, Major," Tyler ventured. "But according to the BBC, nobody goes out and has a child just so she can claim child support - it's hardly a king's ransom, you know. I'll bet you wouldn't get pregnant for that kind of money."

Spluttering, the Major charged on. "I want you to look out the numbers. I'll bet the lower orders are breeding like rabbits. Hopeless moronic girls dropping no-hope kids left right and centre. All paid for by us! US!!"

****

What we need here are a few facts.

And what we need to know before anything is whether the birth rate is higher among benefit dependents than among those who pay their own way?

Luckily the Office for National Statistics publishes an annual review of births in England and Wales, and the most recent one is entitled Who is having babies? Which sounds like it ought to answer our question straight away.

Except that it doesn't.

Yes, it tells us there were 708,711 babies born in 2008. And that over half were born to mothers aged between 25 and 35, with a quarter being born to younger women.

It also tells us that of those births registered jointly by two parents (either married or unmarried), the vast majority were to fathers who claimed to have some recognised occupation (ie something other than lying in bed all day drinking cut-price lager and procreating):

But those stats don't tell us what we need to know.

For one thing they only apply to births registered to couples. 43,000 births (6% of the total) were to single women not living with a partner. And the ONS report gives us no information on their socio-economic classification.

Moreover, there's another c40,000 registered to fathers who are"unclassified", and we can all imagine what sort of fathers they might be.

And then again, of the births registered jointly to couples, a stonking 70,000 of them were registered to couples who weren't actually living together at the time of registration. Now, does that sound like a viable benefit-free home background?

Unfortunately, that's all the info the ONS summary gives us.

In fact, that's pretty well all the hard info we've been able to uncover at the national level.

But there are some local stats which cast a very interesting light on how baby production incentives work in areas where alternative employment opportunities are limited. And they are the stats that show for each local authority area the percentage of births that are to unmarried mothers.

Across the country as a whole, that percentage is now 45% - ie nearly half of all births are now to unmarried mothers. But in some areas of the country that percentage is much higher.

In 2009, the highest was in Blackpool, where no fewer than 69% of babies were born outside marriage. In Blackpool to be born to married parents puts you in a minority of just 31% of your peers.

Joint second highest were Easington and Hartlepool on 68%. And here's the whole top 10 (the national average is 45% remember):

Spot the pattern?

Take a moment to study the list.

Yes, that's correct - all of these areas are in economic black spots up North and in South Wales. All have relatively high unemployment rates, relatively low wages, and rather limited alternative career options for girls at the bottom. All have relatively high welfare dependency.

Compare and contrast with the areas where the percentage of births outside marriage are lowest (ie where the vast majority of babies are born to married couples).

The very lowest, on just 27%, is the Royal Borough itself - leafy Windsor and Maidenhead. Then comes Wokingham (29%), Slough (32%), Surrey (32%), and the somewhat inappropriately named Rutland (33%).

And what have all those areas got in common?

Yes, right again - relatively low unemployment, relatively high wages, and relatively low welfare dependency. In other words, a career having kids hasto be relatively less attractive.

OK. OK. Not very scientific.

True. That's because the government does not publish the data we really need to see, so we're driven to these alternatives.

But it does make you think.

Further investigation required. Preferably by the government.

PS If you haven't already done so you should read this excellent article by Dennis Sewell on eugenics and the welfare state. It recounts how the socialist founders of the welfare state believed it would need to be accompanied by the elimination of anti-social elements. As the sainted William Beveridge put it: ‘those men who through general defects are unable to fill such a whole place in industry, are to be recognised as “unemployable”. They must become the acknowledged dependents of the State... but with complete and permanent loss of all citizen rights — including not only the franchise but civil freedom and fatherhood.’ Pity he never got the chance to share his bracing ideas with the Major.