Martin Wolf has a blistering piece in today's Financial Times (£) challenging David Cameron's stubborn adherence to austerity economics.
[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.
What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started.
Wolf then turns to the argument repeatedly put forward by the coalition as well as a rabble of right-wing interest groups that spending under Labour was “out of control”.
This deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.
Wolf busts this myth in a single blow:
In 2007, according to the IMF, UK net debt – at 38 per cent of GDP – was the second-lowest in the Group of Seven leading economies. These levels were also exceptionally low by UK historical standards (see bottom left graph).
Some think reckless spending explains the jump in government spending from 40.7 per cent of GDP in 2007-08 to 47.4 per cent two years later…No: the collapse in GDP, relative to expectations, caused the jump in spending and decline in receipts, relative to GDP.
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16 Responses to “The FT tears apart austerity economics (again)”
Gareth Millward
But with pensions there will always be a liability or debt because money has to be paid out while new money is coming in. The issue we have at the moment is that during people’s working lives they aren’t putting enough in for the state to cover its costs in the long run.
You solve that by a) making the economy grow so tax revenues increase, b) making people work longer (a necessary side-effect of living longer) so that they contribute more over their lifetimes and c) regulating pensions in such a way that they become sustainable. That final one isn’t easy, but you’ve not convinced me the answer is simply to ditch them.
Again, you’re using the 5.3 trillion figure as if it will be paid up front. The state will never have to pay “14 times its level of taxes”, because that £5.3t will be paid over decades.
You make out that the pensions is “debt” and “borrowing” but that is disingenuous. That £5.3t is contributed to every year. It will only ever have to be paid in full if everyone retired tomorrow and expected 15 years of pension to be paid up front. That’s not how it works. People continue to pay their tax and national insurance while others are drawing out. What if every citizen and employer was told to pay its next 15 years of contributions up front?
We have a demographic problem, and one that will get worse. We will inevitably be forced to contribute more as we have an ageing population. But this will be the case regardless of whether the state provides pensions or not. It’s simple maths – the more dependents you have in a country versus workers, the more workers will have to pay to maintain them. That’s not the making of any government – that’s simply the fact that fewer people are dying and not enough are being born.
The relevant figure is how much pension payments are going to rise over the next 20 years versus income from workers. Yes, this is problematic, and something we need to pay more attention to. You won’t get any arguments there. But this is the relevant figure. Please provide it.
I’m not going to bother debating this any more, because you’ve shown yourself quite unwilling to engage with the argument. It’s clear you want to simply “prove” with irrelevant statistics that we would all be better if we just cut welfare and allowed people to pay no tax at all. I should have learnt by now that feeding a troll is stupid.
LB
But with pensions there will always be a liability or debt because money has to be paid out while new money is coming in
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Not if you run a funded scheme. However, if you run an unfunded or Ponzi, then there will be a net liability or debt.
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The issue we have at the moment is that during people’s working lives they aren’t putting enough in for the state to cover its costs in the long run.
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No. The issue is that people are putting enough in, but the state is spending it, leaving the liability.
For example, if a 26K a year worker had been allowed to invest their money, they would have a fund bigger than 560K. The unafordable state pensions costs 130K. 560K funds a 19K a year inflation linked, joint life pension from 65.
So people are paying in enough, its the state that’s stripped the assets.
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That final one isn’t easy, but you’ve not convinced me the answer is simply to ditch them.
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I didn’t say that, is it your plan? Default on them?
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You solve that by a) making the economy grow so tax revenues increase, b) making people work longer (a necessary side-effect of living longer) so that they contribute more over their lifetimes and c) regulating pensions in such a way that they become sustainable
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Congratulations on point a, where you’ve admitted that its only by taking more money from people (which isn’t exactly pro growth) that you close a gap.
b) Working longer is a partial default, and whacking people for more money.
c) What regulations?
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Again, you’re using the 5.3 trillion figure as if it will be paid up front. The state will never have to pay “14 times its level of taxes”, because that £5.3t will be paid over decades.
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OK, try reading the ONS link.
It’s a present value.
For example, the borrowing of 1,200 bn doesn’t have to be paid up front. It’s spread out. Over all however, its not 1,200 bn that gets repaid it is far far more. 1,200 is the notional value, you’ve got the interest payments on top. It’s a present value.
Same with the 5,300. It’s linked to above inflation. It is a present value (and an underestimate too) of the present value of the past pensions debts.
If inflation was 3%, next year, that figure rises to well over 5,460 bn.
5,300 * 1.03 = 5460. That assumes wage inflation is below 3%. (The triple lock).
You need realize that the 5,300 behaves just like an inflation linked Gilt. It gets bigger with inflation. It’s also getting bigger with demographics.
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The relevant figure is how much pension payments are going to rise over the next 20 years versus income from workers.
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For example, from the same ONS article, the pension debts went up by 736 billion a year from 2005-2010.
That means huge increases in future spending comitments to the extent that the state won’t be able to pay because it exceeds their ability to tax.
The Laffer curve does have an effect.Tax 100% and your screwed.
I’m saying that the spending comitments for the pension are in excess of the ability to tax.
So you’re advocating massive cuts and massive tax increases, in the future.
That’s particularly unpleasant for lots of people.
e.g No state pension.
I think that’s immoral for MPs to do that to people, whilst they make sure they are exempted.
Newsbot9
He’s an anti-pension shill, trying to engage him on this is silly. He doesn’t understand the concept of paying out of current tax.
Newsbot9
The point is he wants to abolish pensions, so there will be no more tax entering the system!
Newsbot9
Yes, you keep claiming that people would magically be able to “invest” NI. Nope, employer’s NI – lost to company profits, in your scenario. And many people would face a pay cut to mean the same take-home pay.
Your fund would be, using actual rates and fees as of today, more like 54k rather than 250k. Well under the state pension provision.
And of course you think it’s immoral to pay yourself a pension why you’re denying it to others, but you’re trying to do it anyway!