Can we cap the debt?

Next week, Conservative MP Sajid Javid will put forward a ‘ten minute rule bill’ to attempt to introduce a legal cap on the size of the net national debt. Although the proposal has no immediate prospect of becoming law, the Member of Parliament for Bromsgrove makes an intriguing – and very compelling – case.

Politicians, he argues, simply cannot be trusted with the public finances. They will always be tempted to spend now and worry about paying further down the line (or very often to shuffle the invoice on to a future government or hand it down to an entirely new generation of voters).

The official national debt has trebled in nominal terms since 1997 and will continue to rise in the next few years until it exceeds 70% of GDP. Despite the much trumpeted deficit reduction strategy of the coalition government, it is George Osborne’s intention to add around £350bn to the national debt before the next election. So much for the so called cuts.

Sajid Javid wishes to impose some form of legal or constitutional restrictions on the debt the government can accumulate. He readily concedes that this is fraught with constitutional difficulties. The doctrine of Parliamentary sovereignty means a current Parliament can’t bind its successors. If a majority of MPs wish to vote for fiscal incontinence then fiscal incontinence is what we will get. During the course of my lifetime, this is very much what we have got, with public spending more than trebling in real terms since the early 1970s.

This does not prevent the introduction of a series of checks and balances, of course. But these don’t provide a copper-bottomed guarantee against a debt ceiling being breached, not by any means. The letters the Bank of England need to send the Chancellor when the inflation target is missed is proof positive of this. However, there is at least some mechanism to stimulate public debate – and possibly even opprobrium – when targets are missed. No such formal mechanism exists for budget deficits.

A wider problem, which again Javid is aware of, is that the bulk of the ‘real’ debt is off the balance sheet and relates to future liabilities, such as public sector pensions. There is little merit in tackling the official national debt if the off-balance debt grows unchecked. On most measurements, the latter is around five or six times the size of the former. Indeed, there must be a concern that a rigorously enforced deficit cap could even have the perverse consequence of encouraging a growth in future liabilities. A reckless or desperate Chancellor could make savings within a given fiscal year – by, say, freezing public sector pay, but offset this by undertaking to provide much more generous pensions to public sector workers in years to come. The ‘benefit’ to the nation’s finances would be illusory at best.

Similarly, a government determined to come in under a debt ceiling might take damaging steps to seize or nationalise private assets, such as pensions, in order to improve its immediate balance sheet position.

Sajid Javid sees an enhanced role for the Office of Budget Responsibility in tackling this problem and is right to argue that the first key step is to demand greater transparency in off balance sheet liabilities and then to consider including these items within a revised cap.

Javid does not commit himself to a specific debt cap - he believes it ultimately needs to be decided by the Treasury – but he suggests a figure of around 40% might be appropriate. Were such a figure reached and stuck to, this might have the effect of getting public spending under stricter control than the coalition’s modest plans presently entail.

The encouraging thing about Sajid Javid’s initiative is that, as a politician, he has taken the rather unusual step of readily admitting he doesn’t have all the answers. He is, however, most definitely asking a lot of the right questions.

The fact that he is drawing attention to the debt mountain is welcome enough. But that he is also seeking to draw up a long-term plan to try and prevent over-spending in future is doubly so.

I agree that it is good the a politician is thinking like this. However, the problem is that it might encourage politicians to circumvent the rule of law. We have had the confiscation of private pension fund assets in Argentina and Hungary (used to pay down their explicit debt) and their replacement with unfunded promises precisely for this reason. One only has to think of "Enron" to realise how the application of specific accounting rules can lead to very unsavoury behaviour. If the problem is that one generation wants to spend at the expense of the next, it is easy enough for politicians to find ways to do this that cause even bigger problems in years to come without explicit borrowing. Even his own party is likely to abolish contracting out of state pensions and then use the money to pay current pensions whilst giving people a right to a future pension (instead of allowing them to save in capital markets). This will be a £9bn inter-generational transfer each year. Will Javid support it when the whips are out in force? I could only support this if inter-generational modelling were used to estimate all debt and that was capped.

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