If the accounts of the developed nations were judged in the
same way that businesses were, then they would have declared bankrupt a
long time ago and their directors taken to court for irresponsible
behaviour, if not downright criminality in raiding their employees'
pensions funds. For that, in a nutshell, is what developed countries have
been doing. They have been 'trading', more or less, on an even keel,
rather like an old-fashioned family firm that just about makes sufficient
profits to pay for maintenance of its assets and perhaps a modicum of new
investment from time to time. But the old-fashioned family firm -- of the
sort that usually supplied a good canteen for its staff and a nice sports
ground and facilities -- would also be regularly plonking money away into
safe funds for its employees' pensions.
But, it will be objected, the accounts of nation-states should not be
compared with business companies. A nation's 'business' is not to make
profits but to serve its constituents. All right, if that is accepted,
then what about the moral obligation it has taken on (just like an
old-fashioned business) to look after its elderly when they have reached
the end of their working lives? In this regard, the duty of care is
exactly the same. It should be judged accordingly.
When William Beveridge wrote his great Report on national insurance in
the last years of World War II, which he cleverly foisted on a reluctant
Churchill (though the latter didn't have the chance of introducing it, as
it happened) he made a bad mistake. And, because most developed countries
adopted similar schemes shortly afterwards, they also inherited the same
mistake.
The basic mistake is not something we should pillory Beveridge for. It
was made in good faith, and nobody queried it at the time. There were
then about 10 active workers for every retired person and it made
abundant sense that if every worker contributed a relatively small amount
every week out of his wage packet then every old person could be given an
adequate, albeit not over-generous, pension. Since then, however, the
ratio has been declining. It is now about 4 workers for every retired
person. In a few years' time it will be 2 workers per oldie. And it will
even decline to less than this if most parents in developed countries
don't quickly re-acquire the habit of having a replacement number of
children -- namely 2.2 per family. Considering also that every retired
person, in living longer, is also 'acquiring' many more chronic diseases
than previously (a similar sort of oversight made by Aneurin Bevan when
he introduced the National Health Service), the problem not only grows
but becomes compounded.
While we can excuse both Beveridge and Bevan, there can be no excuses for
the politicians of all advanced countries in the last two or three
decades as it became increasingly obvious that crunch-time would come
sooner or later. Not only has it been obvious, but woe betide any
politician or civil servant who attempted to start setting the matter
stright. Some three or four years ago, Frank Field, for example, was
kicked out of his ministerial position by Blair as soon as he tried to
put forward an alternative pensions plan which was sustainable.
And so it goes on. But the problem won't go away. Periodically, attention
is drawn to certain catastrophe of the old, the unemployed and the sick
-- yes, even in the most advanced countries in the world -- by
increasingly authoritative voices. The latest one is Peter Heller, the
deputy director of fiscal affairs at the International Monetary Fund and
some of his results are shown in an Economist article below. As
can be seen, many governments have given promises to their electorate
which they cannot possibly deliver unless some drastic changes are made
in the insurance rates that workers pay and, moreover, a start made in
starting pension funds which can guarantee at least part of future
pensions in the medium term future and total pensions in the longer
term.
I also follow with an article on a similar theme by Hamish McRae,
economics editor of the Independent. He also dwells on the fact
that, in most developed countries, individuals are also in debt -- and to
a considerable extent in some. The average credit card debt in England is
well beyond a year's disposable income. God knows what will happen when
interest rates start increasing towards more normal rates.However, he
very firmly considers that government debt is far more serious than
personal consumer debt.
There is something in the subject of psychology which is called the
Miller Effect. This says that we pay by far the most attention to
immediate problems, even if they are trivial, while we take little notice
of catastrophes if they are far distant. Unfortunately, politicians seem
to suffer from the Miller Effect far more than the rest of us. But that
is what they are paid for! At least, that is what they offer to do when
they put themselves up for election. However, as Hamish McRae says,
politicans don't worry overmuch because they won't be in office when the
bailiffs call on their former electors. I'm increasingly thinking that,
to be realistic, governments should give sufficient notice that people
should start to take on the responsibility of looking after themselves
and how they are going to live when they retire from work because all the
evidence suggest that politicians will never be able to. Also, perhaps
parents would start to have more children so, if the government fails to
help them in their old age -- as seems almost certain -- then they will
have someone to rely on when they become infirm.
Keith Hudson
<<<<
IN THE LONG RUN WE ARE ALL BROKE
How to stop governments going bust
Investors have good reason to worry about states defaulting on their
loans: Argentina and Russia provide chastening recent reminders. But both
were dysfunctional economies with troubled political pasts. Surely, there
is no need to worry about the indebtedness of the governments of stable,
advanced countries?
Maybe not, but take a look all the same at the table below.
____
Iceberg ahead
Govenrment net debt as % of GDP in 2002
Country -- Explicit debt/Implicit debt
(in order of size of implicit debt)
Canada -- 45/420
Spain -- 42/355
Belgium -- 100/310
Holland -- 45/290
United States --45/265
France -- 40/230
Germany -- 45/200
Denmark -- 25/175
UK -- 30/110
____
Most countries' explicit net debt -- issued as bonds and traded every day
in financial markets -- is at manageable levels, relative to GDP.
However, embodied in current tax and expenditure policies are a lot of
obligations for which governments have not yet had to make explicit
provision. This implicit liability arises mainly from future increases in
spending on pensions and health care. Include it, and total debt vaults
to levels last seen (for explicit debt) in wartime. Governments often
fall into bad habits when their debts are so high, usually by resorting
to the printing press and using inflation to cut the real value of their
liabilities.
Credit-rating agencies are alerting their clients to the danger. Standard
& Poor's gave warning last year that many European governments will
be relegated to the second division of borrowers if they do not tackle
spending commitments that are set to soar as populations age. So far,
however, investors do not appear to be charging higher risk premiums on
explicit debt-the sanction that would most concentrate the minds of
finance ministers.
Yet the long-term budgetary risks are real and looming ever closer, says
Peter Heller, deputy director of fiscal affairs at the International
Monetary Fund, in a thought-provoking new book. (Who Will Pay? Coping
with Aging Societies, Climate Change, and Other Long-Term Fiscal
Challenges) These risks arise not only from the effects of an ageing
population on pension and health-care bills, but also potentially from
medical technology, global warming, security and globalisation.
Irrespective of ageing, advances in medical technology are likely to push
up public spending on health care: the more medical science and public
health services can provide, the more people will want. Climate change
may increase the incidence of floods, storms and droughts --
"extreme weather events" -- after which governments often step
in as insurers of last resort. Some governments are already under
pressure to spend more on defence: the "peace dividend" made
possible by the end of the cold war is exhausted. And globalisation may
limit governments' ability to exploit their national tax bases as both
capital and labour become increasingly footloose.
There may be some pleasant surprises to set against this catalogue of
doom. Rising productivity ought to mean that future generations are
richer and will be able to afford bigger tax bills, especially if the
world economy enjoys the sort of productivity growth that America has
experienced in recent years. Europeans could start to have more children,
who would prop up their onerous pay-as-you-go pension systems.
Mr Heller accepts that there are huge uncertainties; after all, fiscal
forecasts a year ahead, let alone a decade or more, are often wildly
wrong. But he thinks that the balance of risks lies on the downside.
Worse, risks may hit the public finances at the same time; for example,
governments in Europe could find their outlays ballooning from
weather-related damage as well as population ageing. As for appealing to
the generosity of future richer generations, he is properly dubious about
governments' ability to squeeze more tax out of their citizens. Higher
tax rates might merely mean a bigger shadow economy, or an abandonment of
over-taxed work in favour of untaxed leisure.
Plan, plan and plan again
So what is to be done? First, governments must look much farther
ahead than they do now. An increasing number of western countries are
planning their public finances on a basis of three to five years, but
this is nowhere near enough, argues Mr Heller. They need to incorporate a
long-range perspective (of at least 25 years and preferably more) into
their budgets. Second, these projections should be vetted by independent
agencies such as America's Congressional Budget Office, because of
governments' tendency to see the silver lining and not the
cloud.
Such long-range forecasts would alert both politicians and the general
public to the need for pre-emptive action to avoid a future fiscal
crunch. One way forward would then be to run budget surpluses over the
next few years in order to create borrowing room in the more distant
future. But Mr Heller cautions against pinning too much hope on this
approach. It has been tried before. In the late 1990s, America's Social
Security surpluses were supposedly in a "lockbox" -- which was
prised open the moment the rest of the federal budget swung into deficit.
Similarly, Norway's supposedly separate rainy-day fund, financed from oil
and gas revenues, was raided in 2001 to meet immediate budgetary
pressures.
If governments are to avoid going bust, politicians will have to grasp
the nettle. They must cut back on the over-generous promises they have
made to their citizens, above all in pensions and health care. And they
must do so sooner rather than later. Delay means that future generations
of pensioners will find themselves short-changed through an abrupt cut in
benefits. Given due warning, they could take steps to protect their
incomes in retirement.
Politically, this is not much easier than promising to lock away
surpluses. Even so, recent pension reforms by European governments are a
small step in the right direction. But how much better it would be if
governments published comprehensive long-range fiscal projections,
scrutinised by independent bodies and open to public debate. Unless
governments are forced to be honest about their predicament, it will be
hard to stop them going bust:
Economist -- 22 November 2003
>>>>
<<<<
IT'S THE GOVERNMENT DEBT THAT SHOULD WORRY US
Hamish McRae
Mortgage borrowing up 14 per cent and spending expected to be up more
than 5 per cent this Christmas -- the borrowing boom seems to continue.
But as the debts mount, so too do the worries. And those worries are not
just about the risks people take on by borrowing too much but also about
the risks to the economy were they not to borrow too much. Economic
growth depends on consumers keeping going.
But of course it is not just consumers who are increasing their debts.
Our government is increasing its debts too, debts which it takes on our
behalf as taxpayers. We will leam next week just how much when the
Chancellor produces his pre-Budget report but it is pretty clear that he
will need to borrow about £30bn this year to make ends meet.
The same pattern is happening all over the world. On the Continent, where
personal debts tend to be lower than here, government debts are higher.
In the States people and the administration are both plunging deeper into
debt. Proportionate to the size of the economy, the US is running up
debts as fast as France and Germany, the two countries that have just
broken the EU's Stability and Growth Pact. You don't have to be an
economist or a banker to wonder where it will all end. Common sense says
things cannot go on like this.
But while the surge of debt is a matter for concern, it should not, I
suggest, be a matter for panic. The important thing to get clear is there
are good reasons for borrowing and bad ones. And this applies both to
people and to governments.
As a broad principle it makes sense to borrow if it is to acquire an
asset or to invest in some project that generates a stream of revenue
that clears the debt. It makes less sense if it is just to consume
something now instead of waiting and having it in a few months' time. Now
try applying this.
Start with people because that is the bit within our control, then a
quick word about our political masters. The surge in our mortgage
borrowing is not quite as alarming as it looks. Sure, it is huge and
sure, quite a lot of the additional borrowing is not because people are
moving house but because they are putting aside some cash to spend. Some
figures suggest that close to 10 per cent of our spending is financed by
borrowing in this way.
But as we all know, a lot of people are taking out additional mortgages
not to move but to improve their existing property. Ten years ago if you
wanted a bigger house you moved. Now that stamp duty has risen so much
there is a huge penalty on moving. The cheaper way to get their extra
space is to add on a conservatory, have a loft conversion, or maybe
convert the garage into an office.
A further tranche of mortgage lending is for buy-to-rent rather than
owner-occupation. This too has led to some tooth-sucking: do people
really realise that property prices might fall? But the idea that somehow
it is more virtuous to borrow to buy your own home than to buy one to
rent to someone else is, in economic terms, illiterate. If you live in a
house it is unlikely to produce much income to dear the debt, whereas if
you rent it out the whole idea is to make a profit. So let's not worry
too much about that.
There are however three areas where there should be real
concern.
One is when people deliberately over-house themselves because they
believe they will make a profit on the deal. That has been a source to
riches for many over the past 40 years but may not be in the future. In a
world of high inflation, sooner or later any investment in property comes
good. Even people who were caught in the negative equity trap of the
early 1990s are now ahead, assuming that is that they managed to keep up
the payments.
But the future may not be a period of high inflation or even inflation at
all Because prices have risen all our lives we assume they will continue
to do so. But there have been several periods over the past 200 years
when prices of property have fallen, just as prices of goods are falling
now. Indeed the fact that interest rates are very low implicitly suggests
that inflation will be very low and may even disappear.
A second concern is the extent to which young people build up debt from
their student days, an issue that is going to loom larger. Apply the
principle: if the investment in higher education enables people to earn
more in later life -- and all the statistics suggest it does -- then it
makes sense to borrow to get the qualifications. But what is good for the
general may not be right for the specific. Some people may be taking on
debts that, for whatever reason, they may not be able to service. So
leaving university with a pile of debt does commit young people to
getting a reasonably-paid job.
And a third concern is the swathe of borrowing at high interest rates for
ordinary day-to-day consumption. Far too often this is couched in moral
terms, whereas the matter ought to be presented in practical ones. Do
borrowers realise how interest payments will eat into their real wealth?
Do they realise the penalties for defaulting? Do they realise that the
things they are buying may well become cheaper if they wait, saving them
both the interest and giving them a better price? Do people simply get
into a muddle because it is so easy to hand over the bit of
plastic?
I suppose all these concerns matter less when people have a continuing
and growing stream of income: you just earn your way out of trouble. But
if your income falls then there is a problem.
The general conclusion that stems from all this is that consumer and
mortgage debt in Britain is mostly manageable. People are not stupid.
They may to some extent have been seduced by low interest rates but most
are very well aware that rates will go up, as they have started to do.
They make the reasonable assumption that in a world of low inflation,
rates will not rise that much. They also reckon that the job market will
remain fairly strong, which also seems reasonable.
Of course debts cannot carry on rising at their present rate and of
course some individuals will have problems repaying. That will be very '
unpleasant for them and disturbing for society as a whole. But I don't
think there is a catastrophe on a national scale a-brewing in the next
couple of years. Much more likely is a longer period of slight
disappointment as homes do not rise much in value as they expect, just as
many people are discovering their pensions are not worth what they
thought they were, and that taxes are higher than they were led to
expect.
But if we need not, in general, worry about personal debt we should be
worried about national debt. Britain is in a better position than most EU
countries as we have reasonable growth prospects and lowish overall
debts. Our debts are rising at close to 3 per cent of GDP but next year
we may grow at close to that rate. This is not the case elsewhere. The
most obvious disaster is Germany, which has low growth prospects, a
declining workforce and huge, rising national and local government debts.
Italy is in the same boat, France not quite as bad.
But beware even here. We are OK but not great And next Wednesday, when
the Chancellor admits that he has got his sums wrong again, we should
remember a new golden rule. People, by and large, are sensible about debt
because they know they will have to pay it back. Politicians, by and
large, are not because they know they will be out of office when the
bills land years later.
Hamish McRae is the economics editor of the Independent
Independent -- 3 December 2003
>>>>