Monday, 15 June 2015

Our deficit worries are as nothing compared to the next generation's

Take a look at the chart above. It's the projected figures for the UK's public sector spending balance over the next few decades, run up by the Office for Budget Responsibility and adapted by the Financial Times.

Notice anything clear? Yes, it's that after just five years of surplus late in this Parliament and early in the next, it plunges further and further into the red. Even with most of the real public spending cuts still to come. It's a grim picture.

The three main reasons for this deteriorating situation are all simple: more health spending, more social care spending, and increased state pension payouts, which ramp up from 5.1% to 7.3% of GDP. It's all to do with our ageing population - and Britain is ageing at an alarming, alarming rate (Scotland is about to age even more quickly, and its deficit figures are even more grisly, but that's a tale for a different day).

So what to make of it? Well, you could say that this picture reconfirms the Chancellor's view that our deficit is too high for what are becoming more normal times. Run a surplus for a few years, and you're better equipped to deal with shortfalls in subsequent decades.

Except that our real long-term challenges dwarf anything that Mr Osborne can do with cuts and savings. The British need to face up to the fact that austerity is a glib, unsatisfactory and ultimately useless tool with which to meet this challenge. It's won an election, by discrediting Labour as a bunch of free-spending socialist throwbacks who can't be trusted with the economy, but it won't meet this challenge. All the real answers are macroeconomic, and they pose really big policy choices. Wielding the axe is simple. This slow-burning crisis is anything but.

What do we need to do, then? Well, we will need to raise the UK's absolutely abysmal labour productivity. Then, to plug this massive funding gap still further, we have a choice of two options most Britons will find unpalatable: much higher immigration, which tends to be of the young and hard-working, to pay for all these pensions and all this medical care; or much higher National Insurance and Income Tax to stave off all this borrowing on the revenue side. Or, probably, a mix of both. The OBR's figures already assume an annual net influx of 165,000 people, while some form of deal involving older voters paying more for all this - via charges on their vast holdings of property and capital - may be inevitable, whether or not they're mandated to happen via public or private sector provision.

But we've just had an election in which the United Kingdom Independence Party gained 12.6 per cent of the vote, mainly on an anti-immigration platform; and in which the Conservative Party bent over backwards to please voters over 55, a strategy which worked very, very well when they backed the party in huge numbers and basically decided the election all on their own.

So even limited moves towards a series of actually sane labour market, immigration and taxation policies may be very difficult indeed. Let's face it: we're likely to plunge ever-further into the red between the 2020s and the 2060s.

And all the cuts you're about to endure - all those grandmothers waiting in vain to an agreement on nursing care in their own homes, all those crime victims wondering why the police are taking so long, all those low-income workers toiling longer and longer as Tax Credits are scaled back, all those students paying more and more once their grants are converted into loans, all those queuing in the clogged-up and collapsing courts system, all those Further Education students crammed into ageing buildings - will have been useless. Our debt burden as a country will end up, if anything, quite a lot higher in the 2060s than it is now.

All of that pain will have been for precisely nothing.