Tuesday, 20 April 2010

Mind the elephant

Via The Cobden Centre, I discovered this Telegraph article by Liam Halligan:

Labour says it will "protect schools, hospitals and the police from spending cuts", while raising national insurance contributions. The Tories won't increase NICs, but will give a £150 annual tax break to married couples. The Lib Dems, meanwhile, will slash tax relief on higher earners' pension savings, while restoring the £10,000 income tax threshold.

The important point is that all parties - even the "honest" Lib Dems - are at least £30bn short when it comes to explaining how they'll "halve the deficit" – even if Labour's growth numbers come true. The unspecified spending cuts and tax rises needed to fill those black holes will swamp party political nuances, whoever wins the election. That's an affront to democracy.

The fiscal denial goes much deeper, though. Even if the deficit is "halved" over the Parliament, the "national debt" – the total stock of debt owed, not just the annual increase – still spirals out of control.

In 1997, the national debt was £350bn. After Gordon Brown's reign of terror at the Treasury, that figure now stands at £776bn. Buried in the 2010 budget documents is an admission our national debt will soon double again to £1,406bn by 2014/15, such is the impact not only of ongoing fiscal profligacy but the financial meltdown caused, and then savagely exploited, by the world's "leading investment banks".

He goes on to explain that

While these are absolutely ghastly numbers, the reality is far worse. If you can stand it, I'd ask you to look at the graph accompanying this article. It shows that if government spending continues at current levels, the UK's national debt explodes from 70pc to more than 500pc of GDP by 2040. Were that to happen, debt interest payments would equal 27pc of GDP, more than half of all tax revenues. This is the reality we face. Yet our politicians still deal in, and present as "austerity measures", deficit reduction plans which barely dent state spending.

The figures are from a report by the Bank for International Settlements: The Future of Public Debt: prospects and implications.

As Halligan explains,

The trajectory of UK public debt is the most terrifying of any leading country on earth with the exception of Japan (which anyway has far more savings than the UK and the world's second biggest haul of foreign exchange reserves).

The reason the UK is in such dire straits going forward, apart from the legacy of Brown and the credit crunch, is our rapidly ageing population. Generations of politicians have refused to acknowledge this, parking massive and ever-increasing pension and other state liabilities off balance sheet – so the official public debt projections we publish and occasionally debate in this country are fictitious.

So great are these hidden liabilities that, even if the UK controls spending along the lines our politicians now propose, and retains such fiscal vigilance for the next 30 years – avoiding bank bail outs and pre-election spending splurges for decades hence - our debt stock still exceeds 350pc of GDP by 2040.

I thoroughly recommend the whole article.

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