Like having eye surgery at a golf tournament, the Office for Budget Responsibility’s latest report on fiscal risks and sustainability manages to be at once very tedious and very frightening. It is not the sort of document a normal person should be expected to read, and yet it concerns us all. It is a picture of an economy that is ageing badly. Britain can no longer afford to exist as it has in previous decades.
The report describes the UK fiscal outlook as “daunting” and finds “substantial erosion of the UK’s capacity to respond to future shocks and growing pressures on the public finances”. The United Kingdom is still an outstanding country, it concludes – in that we have an outstanding ability to combine large, persistent deficits and high levels of public debt with a stagnant economy and an ageing population. It repeats the key warning from last year’s report: on the current path, by the time today’s teenagers are retiring, Britain’s debts will have reached 270 per cent of GDP.
What will we have spent all those trillions on? The more debt you have, the more you spend on debt. It is already the case that one pound in every ten collected as tax is handed directly to investors as debt interest. This will grow in future because the UK has the highest borrowing costs of any large, advanced economy (only New Zealand and Iceland pay more to borrow).
The same is true of many countries, but the UK may be uniquely exposed. France is running a higher deficit and Italy is in more debt, but they are protected by their membership of the Eurozone. The US has vast debts, but it also has the “exorbitant privilege” of the dollar, as the world’s reserve currency. Japan can rely upon its large current account surplus. Meanwhile the UK does not have the power to get its debt under control. The OBR explains that as recently as 2019-19, it was possible for the UK to stabilise its debt – to stop it growing as a proportion of GDP – while still running a deficit. That would now only be possible by running a significant surplus.
We are also borrowing in a more risky fashion: at shorter maturity, because, a bit like a first-time buyer who can only afford to fix their mortgage for two years, investors see our long-term prospects as relatively poor. We are also borrowing more from abroad.
That is partly because one of the major resources that other countries rely upon to underwrite their debt – their own citizens’ retirement savings – is winding down. We are going to have more retired people in the future, but they are probably going to own fewer government bonds, because the type of pensions we have has changed. The defined benefit pensions enjoyed by today’s retirees own lots of government bonds. The defined contribution schemes being paid into by today’s workers invest in assets with more potential to growth, such as company shares. The newer pensions will not, the OBR predicts, replace the older pensions as buyers of UK government bonds.
While our private pension system quietly makes it more expensive for the government to borrow, our state pension system is bankrupting us more aggressively. In the mid-20th century it accounted for about two per cent of GDP; by the 2070s it may have quadrupled as a share of GDP. The “triple lock” policy of uprating pensions as much as possible has already, the OBR finds, cost about three times as much as expected, demanding an extra £15.5bn per year by the end of this parliament.
If only there was a government with the courage to remove unnecessary benefits from pensioners who didn’t need them!
But while means-testing how much the UK gives to wealthy retirees is a good idea – I’d stop paying the state pension to anyone with a private pension worth over £1m and/or a house worth over £2m – the pensioner poverty that marked previous decades could return. Large numbers of people aren’t saving enough into a pension (16 per cent of workers aren’t saving at all) and in the 2040s, nearly one in five pensioners will be living in private rented accommodation. Britain’s future involves millions of old people who live entirely off the state, and whose needs make other spending growth or investment effectively impossible.
This bleak picture of Britain’s future is reflected in the steepening difference between the cost of borrowing for two years, and the (higher) cost of borrowing for 30 years. Investors do not see us ageing well. It is time for either some very creative accounting or some genuinely different fiscal policy.
[See more: Why the public keep gambling on Farage]
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