The post-war settlement is dead


The 2020 Commission on Public Services, chaired by Sir Andrew Foster, the former Audit Commission chief executive, has apparently said (this is according to the Today Programme report this morning) that the post-war settlement is over, and that the welfare state, as we know it today, is living on borrowed time. 2020's findings deserve a fuller analysis, but for now, here's a graph that shows why the Commission is right:

What this graph from the Bank of International Settlements (BIS) shows is how public debt as a percentage of GDP is going to change over the next thirty years, assuming we stick with current policies. The red line is the baseline scenario, the green line shows what would happen with a small gradual adjustment (a fiscal consolidation of 1% of GDP each year from 2012), and the blue line shows what would happen with a small gradual adjustment in which age-related spending was held constant (as a percentage of GDP).

Whichever way you cut, current policies are quite plainly not going to be affordable in the future. It is worth pointing out, for anyone who thinks that the debt can just be rolled over forever and the day of reckoning delayed indefinitely, that BIS also projected future debt interest payments. Based on the baseline scenario, the UK's debt interest payments would reach c.27% of GDP per year by 2040. That would account for pretty much all the revenue from income tax, national insurance, corporation tax, council tax, and business rates, and wouldn't leave much for anything else.

BIS also points out that the UK would have to run a budget surplus of 10.6 percent of GDP for the next five years if we wanted to stabilize public debt/GDP at 2007 levels. That the coalition government's 'savage cuts' would still leave us with a budget deficit at the end of the current parliament just goes to show how serious the situation is.

Bank of International Settlements: The future of public debt: prospects and implications, March 2010 (PDF)