Friday, October 08, 2010

How Can We Ever Escape?


But does it go anywhere?

Tyler was asked a very good question today. He was explaining to some normal taxpayers just how big the real National Debt has now become, when one of them put her finger on something very troubling. "But surely if the debt's that big" she said, "how can we ever hope to escape?"

Tyler's immediate response was to advise emigration. But can that be right?

Let's recap a few facts.

The official gross National Debt has just broken through the £1 trillion mark, around £40,000 for every single British household.

But as regular BOM readers will know, that official figure vastly understates the government's real debts (eg see this blog). By the time you've added in unfunded public sector pensions, accrued unfunded state pension liabilities, PFI, Network Rail, etc etc, the real National Debt stands at over £5 trillion. And that's without counting the liabilities of our bailed out nationalised banks, which currently stand at around £2.5 trillion.

Now given that our entire annual GDP is only around £1.5 trillion, the government has amassed debts of 4-6 times our annual income. You try borrowing that kind of multiple from your friendly high street bank - they'd laugh at you, knowing you would never ever be able to pay it off.

And neither will the government.

Moreover, even after all the cuts that George will be announcing on 20th October, and all the accompanying screams we'll hear, he still plans for our debts to go on increasing all the way through this current parliament. By 2015-16 our official gross National Debt will have increased to from £1 trillion to £1.5 trillion, and all the hidden debts will almost certainly be higher too.

So OK, you say, we don't necessarily have to pay off the debt. Maybe we could pay the annual debt servicing costs and just sort of run with it.

Hmm.

According to George's Office for Budget Responsibility, by 2015-16 the government's debt interest payments will have surged to £67bn pa, well over double what they were last year, and a bill of over £2500 pa for every British family.

And to that you have to add the annual cost of unfunded public sector pensions - £32 bn pa by 2015-16 - payments under PFI contracts - £10bn pa by 2015-16 - and unfunded state pensions payments which weigh in at an astonishing £79bn pa by 2015-16 (BSP plus SERPS plus S2P).

Add that lot together and the government's annual servicing bill on its real debts will be running at £188bn pa by 2015-16. Which will be an annual bill of £7500 for every single family, and still rising.

So what then?

More public spending cuts?

Yes, we'll need them. But after 5 years of serious cuts, will the government (of any complexion) have the stomach for yet more?

Tax rises?

Maybe. But tax rises would dent what may still be a sluggish recovery. And tax rises to fund debt servicing costs hardly sound like a vote winner.

The miracle cure of course would be faster GDP growth, painlessly lifting tax revenue and cutting welfare related spending. Which is why the government should bust a gut to stimulate that growth, by for example, canning the 50p tax rate soonest.

But failing a growth spurt, we're left with just one option - default, the traditional escape route for failing governments throughout the ages.

Default on the government's formal debt will be quite easy. Inflation is the key, and as we know, we're already running well above the 2% pa supposedly underwritten by the Bank of England. And with all that extra money the Bank printed still sloshing around, it should remain high for a good while yet.

But default via inflation only really works on the government's official debt. The much bigger unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments. Denied a stealth default, the government will have to be much braver on those debts, including a faster and greater increase in the state pension age, and a big cut in public sector pension benefits (much bigger than John Hutton was prepared to let on yesterday).

So where does that leave us?

For the government, escape requires years of spending cuts followed by years of severe restraint. At the same time it requires much bolder action to stimulate sustainable growth (ie tax cuts, especially axing the 50p rate). And unfortunately, the inflation tax looks certain to make a contribution.

For the individual... yup, emigration really does seem the only surefire escape route.

PS Didn't he do well. Longtime readers will recall our previous encounters with Red Ed's right left hand man Sadiq Kahn. Kahn has now ascended to the giddy heights of Shadow Justice Secretary, even though as Guido recounts, he carries a weight of "controversial" baggage. We first clocked him back in 2007 when as a member of the Public Accounts Committee he ate a man in a canoe.

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