Wednesday, October 27, 2010
Why The Real National Debt Is Real
Last week we published our estimate of the Real National Debt, putting it at a very scary £7.9 trillion, or around £300,000 for every British family.
Since then a number of people have dismissed our figure as grossly misleading, and accused us of scaremongering. So let's just run through some of the objections and see what we think.
1. Our nationalised banks have assets as well as liabilities
£2.6 trillion of our debt figure comprises the liabilities of our two big nationalised banks, RBS and Lloyds. The objection is that we have ignored their assets, and therefore hugely over-egged taxpayer exposure.
On one level, that's true. The banks do have huge assets to set against their liabilities, as is fully acknowledged in our research paper.
But the problem is that nobody - including the banks themselves - knows what those assets are actually worth. Whereas the liabilities are now hanging round taxpayers' necks in their entirety.
The final outcome - in terms of our eventual net loss - is anyone's guess. True, most loss estimates are much lower than the entire liability (as noted in our paper), but nobody actually knows. And given the events of the last two years, we believe it's prudent to understand our potential total liability.
Moreover, even if we were to set aside the entire liabilities of RBS and Lloyds as being in some sense temporary, our estimate of the Real National Debt would still stand at £5.3 trillion, or more than £200,000 for every family.
2. Governments have assets as well as liabilities
The second objection is that even this lower figure hugely overstates the debt, because the government itself also has huge assets.
Again, there is some truth in this. According to official estimates, the public sector as a whole has assets of getting on for £1 trillion (see this excellent ONS article for a summary of the official stats).
But we need to understand a couple of things about these assets.
To start with, they mainly comprise specialised physical assets like motorways and hospitals. And such assets are not readily realisable (ie they are not liquid).
Moreover, even if HMG could sell them, much of their assumed value depends on having someone who wants to use a motorway or a hospital and is prepared to pay for the privilege. Their value purely as building plots or agricultural land would be very much less.
Consider who would pay to use a British hospital. Yes, you guessed it - British hospital patients. The hospital's value to a prospective purchaser largely depends on his being able to charge patients for its use, and patients being prepared to pay.
Except in Britain, as things stand, it's not the patient who pays, but the NHS. Or to put it another way, the government could almost certainly sell its hospitals to reduce the debt burden on taxpayers. But only at the cost of the NHS then having to pay a fee to use those very same hospitals. The net effect - the net burden on taxpayers - remains pretty much the same. The only real difference is that yet another chunk of government debt has been shuffled off balance sheet (cf PFI).
3. We are ignoring the government's future tax receipts
This objection says that we shouldn't get fixated on the government's liability to make future payments while ignoring its future receipts of tax revenues. Our analysis is one-sided and a grossly misleading statement of the true fiscal position.
Let's remind ourselves what our Real National Debt calculation is actually looking at.
It's looking at the government's commitment to make future payments in respect of loans or services it has received in the past. Which is the standard and essential definition of debt (see paper).
Thus for example, we include the government's £1.3 trillion accrued liability to make public sector pensions payments. That relates solely to the service and pension contributions of public sector employees in the past - the pension entitlement they have earned so far. What we are saying is that public employees have provided services and loans (their contributions) to the government that they expect to be repaid during their retirement. It is debt, pure and simple.
Similarly, we include the £2.7 trillion liability to make state pension payments. Again, that reflects the accrued liability in respect of National Insurance Contributions already made in the past against pensions to be paid by the government in the future. It is an undischarged loan to the government.
The Real National Debt adds together all these undischarged liabilities that have accrued over the past and tells us where we currently stand overall.
Yes, of course the government will have future tax revenues to draw on in order to meet its debt obligations. Of course. But the greater the debt obligation in respect of past service and loans, the less of those future tax revenues there'll be left over to pay for future services.
Even today, 28% of the government's tax revenues - more than one pound in every four - goes to service these past debts. Two years ago it was just 24%, and the proportion is growing fast (see this blog).
And that's the key point. The massive growth in these obligations from the past is placing a huge strain on the government's ability to fund services in the future.
Sure, the government has revenue raising powers and can always raise future taxes. But that is precisely why taxpayers should be so concerned at the size of the Real National Debt. Unless we recognise and address the full range of government liabilities, taxpayers face a grim future of rising taxes alongside worse public services.
4. The government could always renege on its pension obligations
Since the government can legislate black is white (subject to EU directives), it could simply renege on its pension liabilities, both public sector and state. So things aren't nearly as bad as the TPA make out.
This is quite a popular objection to our calculation, and it must be said that governments across the world are currently embarked on just such schemes.
But we should understand it is no easy option. Quite apart from the moral question raised by robbing defenceless pensioners, events in France and Greece highlight the political difficulty of making substantial changes to existing entitlements. The losers are very obvious, and in the case of public sector workers, highly unionised. It takes a strong government to face down strike-bound public services and street riots.
Of course, it is easier to make changes to future entitlements - by for example gradually increasing the pension age - and our government must do that. Increasing life expectancy means that we must move the pension age up to at least 70 (as Lord Turner has suggested). But that doesn't help much with the existing accrued liability - the liability we include in our calculation.
And that liability is real, not merely some distant entry in an accounting ledger to be left for our grandchildren. It is here with us now, requiring ever greater payments with each year that passes. Two years ago, the cost of public sector and state pensions was £83bn, this year it's £95bn, and growing fast.
The TPA's calculation of the Real National Debt is designed to show the full extent of the liabilities now bearing down on taxpayers' shoulders. And those liabilities arise from loans and services supplied to government in the past: they are not related to services the government may or may not provide in the future.
Yes, there are assets on the other side of the balance sheet, but even on the most optimistic interpretation they cover well under half the debt.
And yes, there are future tax revenues to service the liabilities. But that servicing already consumes more than one-quarter of tax revenue and the proportion is growing. Taxes could certainly be raised, but that is the very reason taxpayers need to be concerned about the huge size of this debt.
As for reneging on the debt - especially the pension debt - that has been an option for desperate governments throughout the ages. But it is not the easy low-pain option often suggested.