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
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: