Just after Christmas a number of members of the IEA’s SMPC wrote to the Sunday Times about the dire need for a fiscal plan to deal with government borrowing. In this context, it is worth coming back to the issue of implicit debt mentioned by Nick Silver in A Bankruptcy Foretold. He argued that the UK’s real national debt was already 276% of GDP in November 2008 – and this was a conservative (i.e. low) estimate. What has happened recently in terms of projected government borrowing does not increase this larger figure significantly.
In this context, does it make that much difference that the government plans to increase official borrowing to 70% of GDP from 40%, thus adding about one tenth to the total national debt including implicit items?
The simple answer is “yes”. The implicit debt that Silver and others have written about is implicit because it is not funded voluntarily. Essentially, public sector workers are promised a pension by the government (that creates implicit government debt). The corresponding “asset” held by private individuals is a government pension promise. That asset is not tradable and a nurse cannot think, “I don’t like the look of these dodgy UK government pension promises, so I shall sell them and buy some Swiss bonds instead.” On the other hand, all the new debt that the government is piling up has to be funded voluntarily by investors who can choose to buy other assets.
The explicit debt could also be regarded by investors as being subordinate to the implicit debt. Will the government default on its pensions before it defaults on its bonds? Probably not. Thus UK sovereign bond investors should be concerned about the ballooning deficits which are in addition to existing, alarming and higher priority implicit pension debts.
But the arguments against government debt are not just about funding – which is why we should be concerned with implicit debt regardless of its impact on funding. Some argue that we will grow our way out of debt. We may. But it is not inevitable. This is especially so because our ability to repay debt depends not on growth in national income per head but on growth in total national income. Population may decline. The argument that we owe the national debt to ourselves also does not hold water (at least, not much water). People value the savings that government bonds represent in pension funds and so on. But effectively, these savings are wiped out by the equal and opposite liability of future tax obligations necessary to repay past borrowing. Do the members of private pension funds know this?
Personally, I think that government borrowing has a moral aspect and it always surprises me that the churchmen who jump on political bandwagons or leftists who bring up moral aspects of inequality (as they see it) do not ever bring this issue up. One generation living it up at the expense of another generation which has no choice in the matter is not acceptable. But I suppose, when you think about it, it is obvious why the left never bring this issue up. Look at the graph below. Government borrowing, implicit and explicit is expanding because the state is not able to finance its own largesse from the explicit taxes it raises on citizens. That is the real problem. Government debt, implicit and explicit, must be cut by cutting government spending.