By far the best contribution to the parliamentary debate on the Emergency Budget was by the MP for Wycombe, Steve Baker. Using impeccable analysis and respected (ONS and Bank for International Settlements) data sources, Mr. Baker painted a frightening scenario in which the fiscal policies of western governments are unsustainable, and were even before the recent crisis erupted.
The government can’t borrow much more, it can’t spend much more and it can’t tax much more; nor can it grow the economy out of its current mess (as if it ever could!). The only other way to pay off its debts is by massive inflation, which would produce a catastrophe reminiscent of the Weimar Republic after World War One.
The implications are national insolvency down the road and it is against this background – and the failure of Keynesian spend-your-way-out-of-it policies that the historic Emergency Budget must be judged. Keynesian policies of fiscal and monetary excess have brought the country to the brink of ruin and need to be repudiated … again, as they were after the IMF crisis in 1976, before the vampire reawoke.
The figures Mr. Baker cited are truly worrying: official debt of £772 billion, itself a not inconsiderable sum, but utterly dwarfed by the government’s existing pension obligations, which raise the total to £4,771 billion, about six times as much. And, if you add in the obligations of the banks, now a ward of the state in more ways than one, you get a figure (using ONS data) of about £6.3 trillion or £6,300 billion – or if you prefer, £6,300,000,000,000. Figures of this magnitude have so many zeros they become incomprehensible, but to give this last figure a sense of magnitude, it is over four times UK GDP.
A billion here, a trillion there, and we are soon talking about real money…
These figures make national bankruptcy inevitable, unless the most drastic measures are taken to avert it.
One hates to add to the general cheeriness, but I would like the suggest that these numbers – though truly frightening, and based on solid sources – are in fact not nearly frightening enough:
1. Most ‘experts’ think that real returns in future will be lower than in the past (lower equity premium, etc) so we should downscale our projections of future real financial returns. This makes the outlook considerably worse.
2. Most projections of pensions obligations ignore longevity risk – the risk of people living longer, unexpectedly, so drawing more from the pension system. (This problem blindsided the supposed experts, the actuaries until post-2000 – think of Equitable Life.) My point is that mortality improvements are much stronger than most people realise and the implications for future pension schemes are very considerable. To give a rough idea, over the next forty years, we might be looking at an increase in pension costs from this factor alone of perhaps 40-50%. Experts are already talking about the ‘toxic tail’ of how many older people will make it to their nineties: this will itself bankrupt many schemes that managed to survive Gordon Brown’s notorious pension fund raids, which wrecked the non-state pension system.
3. Most important of all, the PAYGO pensions/social security nexus is, in essence, just a Ponzi or pyramid-selling scheme. Once one accepts this point, then the rest follows with an unstoppable almost mathematical certainty, i.e. the young get suckered paying ever more into a system that will give them nothing back, the problem gets worse over time, and collapse is inevitable anyway – remember Madoff?
4. One is looking a future of intergenerational warfare, in which the oldsters (who benefited from the system) become more numerous and want ever more entitlements (expensive medical care, etc) for ever longer periods, and expect their children and grandchildren to honour up debt obligations incurred well before they were born. This was always an unpleasant deal but the kitty is now empty. The youngsters meanwhile have their college debts to pay off, can’t get on the housing ladder, face ever more difficult labour market conditions, face higher tax burdens and have none of the economic security (guaranteed pensions, medical care, etc) of their predecessors, which they will have paid for, but won’t get themselves.
In 1930, Maynard Keynes wrote a splendid essay (”Economic Possibilities for our Grandchildren“) in which he looked forward 100 years hence. His musings did not age well: he anticipated that by then the economic problem – endless toil – would be resolved and we would be working 3 hour days to keep our hand in as it were, and he worried about the effects of so much leisure time and boredom on our mental health. This was the same genius who told us the government should spend its way out of recession and that in the long run we were all dead anyway.