Yes, the government is deep in debt. But how deep? The Treasury says about £893 billion, equivalent to 62% of GDP, the amount we earn each year. Even with the promised cuts it will reach 75% of GDP in five years’ time.
That isn’t the half of it; not even a quarter of it. The government owes five or six times more than it lets on. Like the iceberg, its IOUs to lenders are just the part you can see. Far bigger are all those IOUs it has given us on our future pensions and medical bills — promises that keep growing as the population ages.
George Osborne, the chancellor, and Danny Alexander, chief secretary to the Treasury, are simply trying to steer the ship of state round the visible iceberg, unaware of the hidden costs that could still sink it. They should hear the first sonar bleep this summer when the National Institute of Economic and Social Research reports to them on the subject.
The visible bit of the national debt iceberg is the £893 billion of bonds and savings certificates that the government has issued to raise cash. The financial crisis and the bank bailouts have driven that up to a peacetime record. The coalition has no plans to pay it off — its promise to “reduce the deficit” simply means adding to it less fast.
This debt is just half the cost of what we have promised ourselves in free healthcare, according to public debt expert Christian Hagist of Freiburg University. With the baby-boom generation now showing up more in the surgeries, those costs will soar — but nobody in government seems to know how much.
Even larger is the mountain of money we are promised in pensions. It depends on how long we live but, again, the costs are going to escalate as the baby-boomers reach retirement. I estimate the Treasury has promised us £2,200 billion of pension benefits — more than twice the official national debt.
And don’t forget those index-linked pensions promised to civil servants — far more generous than anything available in the private sector. By the time the last of today’s civil servants dies, that will cost another £1,100 billion or so, again eclipsing the official debt.
Nor does the red ink stop there. Just as big are the commitments made to schools and universities, including all the future payouts to private contractors for building and maintaining schools under the private finance initiative (PFI).
I used to be proud of PFI. At the Adam Smith Institute we developed the idea of pulling private development and financial expertise into public infrastructure projects, which civil servants were poor at. But Gordon Brown perverted it into a way of getting new schools and hospitals on tick — winning kudos today and leaving future generations to pay the tab. That’s why he fought so hard to keep the £148 billion potential cost of PFI off the Treasury’s books.
The £28 billion of guarantees on Network Rail’s borrowing looks a tiddler by comparison, as does the £73 billion cost of decommissioning nuclear power stations. Somewhat greater is the £142 billion of commitments to the banks. Nobody knows how much of the £3,000 billion of their business that the government underwrites is bad debt. We should be told.
The coalition needs to get to the bottom of these figures. It has no idea how much is hidden — often deliberately — below the surface and whether government promises are affordable. Overlarge commitments are one reason why the rating agencies downgraded Greece. We can’t expect to escape scrutiny either.
Every promise that government makes today — on pensions, healthcare or welfare — puts a future cost on all of us. Starting with this summer’s report, the coalition needs to get a clear grip on those commitments and whether they are affordable. That is what government demands of private companies, which have to make provision for the future cost of their pension plans. New Zealand put its own government under such rigorous accounting standards 25 years ago. It’s time we followed suit.
Only then will we know if we need to raise taxes to provide for these future costs — or if we need to scale back the generous promises we have made ourselves. Just as Osborne and Alexander are asking us which bits of today’s spending we could live without, they should ask us which of tomorrow’s promises can be ditched. It may well be that things like free higher education or elderly care can’t be afforded.
After that the key is transparency. Any government decision that implies contractual or moral commitments for the future must be fully costed. When politicians promise new schools or more generous pensions, they should state the full future price tag. And our generation, not our children’s generation, should provide for those costs. That’s not just better economics, its better ethics, too.
Published in the Sunday Times here.