As the Office for Budget Responsibility noted yesterday in its new Fiscal Risks and Sustainability Report:
At 94 per cent of GDP, UK government debt is the fourth highest among advanced European economies… and with its 10-year bond yielding 4.5 per cent at the end of June, the UK government faces the third-highest borrowing costs of any advanced economy.
As they said:
The UK's public finances have emerged from a series of major global economic shocks in a relatively vulnerable position.
This appears to be a stark and troubling assessment for the Office for Budget Responsibility, but its implications go far beyond the standard economic arithmetic of debt ratios and gilt yields that dominate much of the OBR's analysis.
First, it is clear from the OBR's own data that the UK's weak fiscal resilience is happening despite taxes having risen to their highest level relative to GDP since the 1950s. In other words, we are taxing heavily but are still running deficits because underlying growth is weak, spending needs have risen, and will keep doing so.
This, though, is not a story of profligacy. It is the predictable consequence of running an economy on the basis of neoliberal dogma. There has been long-term underinvestment in productivity-enhancing public and private infrastructure, as well as austerity in local government and social services spending. This has gone on for so long that crises have become systemic, and hopes that deregulated markets and property bubbles can somehow deliver broad-based prosperity despite this have been shattered. The myth of financial engineering as a basis for prosperity has been blown apart.
Second, the OBR highlights the strain on pensions and health costs due to an ageing population. They note that state pension spending is set to rise from around 5% of GDP today to nearly 8% by the early 2070s, driven by longer life expectancy and the triple lock. Meanwhile, the shift from defined benefit to defined contribution pensions means that households shoulder more risk, many will lack adequate retirement incomes, and demand for gilts from pension funds will dwindle, which they suggest will push up government borrowing costs even further.
The result is that they suggest there is now a fiscal time bomb created decades ago by governments that decided upon the demise of secure workplace pensions, failed to build sufficient rental housing, and left too many self-employed individuals and low earners without meaningful pension savings. The consequence is higher future costs for housing benefit, social care, and, ironically, public debt service itself.
Third, climate change stands as the most daunting fiscal risk of all. The OBR calculates that if global temperatures rise to 3°C above pre-industrial levels, as now seems plausible, then climate-related damages could reduce UK GDP by 8% by the 2070s, pushing debt up by an additional 56% of GDP, just for this reason alone. The costs of transition to net zero add another 21% of GDP, even under moderate assumptions. And that transition might also make life possible, when at 3 degrees, the punishment is not just going to be to GDP, but life as we know it in many ways. Despite that, policymakers are still treating net zero as an economic burden to be minimised, rather than an essential investment in the country's future solvency and security. The costs of inaction vastly exceed those of transition.
So what does all this mean? It means we can't go on as we are. The first real risks to the UK's public finances, and to the living standards of future generations, come not from borrowing as the OBR would have it, but from our failure to invest productively, whilst creating hidden, off-balance sheet liabilities that dwarf any cyclical deficit.
This risk could be addressed. Instead of obsessing about debt levels, as the OBR does, we should be:
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Prioritising public investment that builds productivity, resilience, and a fair transition to a low-carbon economy. Borrowing to build assets that sustain future incomes is fiscally prudent.
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Rebuilding collective pension security, including serious reforms to housing, so older people are not forced to drain savings or rely on housing benefits in old age. I discuss this issue in this morning's video.
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Taxing wealth, rents, and environmentally destructive activities far more effectively, to shift the burden away from labour income and broaden the base that funds state commitments. Some of these are issues I discuss in the Taxing Wealth Report.
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Recognising that fiscal sustainability requires an economy that delivers decent wages, stable work, and healthy local economies and not just balanced books.
There is, however, more to it than that. We also need to rethink the financing of government:
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The £80 billion now spent to subsidise pension and ISA savings for the wealthy has to be reconsidered when those savings are not being put to productive use. This issue is addressed in the Taxing Wealth Report.
- An increased role for the government in the savings market is essential to provide the capital for investment. I have discussed this at length, for example, here. There need be no shortage of funds for investment if only the government rethought how to attract capital for this purpose.
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We need to stop paying interest on the central bank reserve accounts commercial banks hold with the Bank of England, at least in part. There can be no justification for these payments given the state of the UK's national finances.
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The Bank of England's fiscally irresponsible quantitative tightening programme has to end now. The artificial inflation of interest rates that it is promoting is profoundly undesirable in the current economic context.
- We might also need to consider more quantitative easing, or simple central bank financing for government spending if the economy is underperforming and it has the capacity to undertake more economic activity than it is at present.
In other words, the Office for Budget Responsibility needs to stop thinking that we live within a rigid and unalterable economic framework, when in fact we do not.
The OBR is right to issue a warning, but the real problem that the UK faces is not a deficit on the Treasury's cash accounts. It is, instead, decades of neoliberal neglect that have left us with fragile growth, insecure households, escalating climate risks, and a tax system that no longer does its job, plus ingrained thinking by the Office for Budget Responsibility amongst others that suggests structural reofmr of our finances is not possible when it is.
The answer is not to retreat further into austerity. It is to remake the economy so that our future spending needs, on pensions, healthcare, climate, and social support, are matched by an economy robust enough to fund them. That is the only sustainable path forward.
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3°C of warming would mean global food production could drop by half.
Once that happens we’ll all be on rations so a pension won’t be much use anyway.
I agree.
Taking the example of the Industrial Revolution, many nations learnt how Britain had done it. They then took that, used what they liked, changed what they didnt, adapted it to their needs and created their own paths to industrialisation.
There is no reason why we cant do that ourselves now, see what other nations do well – and badly, decide what we are going to adopt and get on with it.
Given that the UK & the USA set up the institutions and constitution that runs German after WW2 that seems like an obvious starting point
A very valid point. Take virtually any metric you like and a country in mainland Europe will be far more effective than us…. and by effective I mean for the general benefit of their population.
I note that OBR continues to say life expectancy is rising. Even ONS says life expectancy stalled circa 2013, about the time the actuaries said it had. It has in many regions declined since then. So apart from the very wealthy in the South of England the pension providers are over estimating their liabilities and hence ensuring low pensions for those who will never receive them.
Perhaps, following regional standardised mortality rates should be a required activity for members of OBR?
“First, it is clear from the OBR’s own data that the UK’s weak fiscal resilience is happening despite taxes having risen to their highest level relative to GDP since the 1950s. In other words, we are taxing heavily but are still running deficits because underlying growth is weak, spending needs have risen, and will keep doing so”.
A critical factor in this failure is never mentioned, and no questions are asked. How big is the British ‘black economy’? What is its size relative to ‘official’ GDP? How much tax is lost? How much economic activity is not recorded? And here is where the sewer of the black economy, which we try so hard to ignore in Britain, or pretend it doesn’t really count, seeps out into the world to spoil our sad illusions about this country: its deniable presence comes to us as a nightmare, in small boats.
It appears to have taken President Macron to ask the elephant-in-the-room question the British are so anxious to believe isn’t there. Why do people take the high-level risk of dying in the attempt, and put themselves in the hands of people traffickers (who may never let them go, even if they survive the expensive middle passage in the Channel, and treated no better than a slave?). The British even have an illusion to serve that fate. They come because they are in awe of our prosperity and freedom, and the ease with which they have access to our Welfare State provisions. Luxury and ease await.
The real reason is quite different. Britain is the place to come for undocumented immigrants, because from experience over decades, it is far easier to disappear immediately into a large and well-oiled black economy. That is the truth Macron appears to be trying to convey.
We have been doing this for decades. White vans traversing the country, filled with labour from who-knows-where. It became a convention of British life. Our crackpot idea of a free enterprise society. You think I exaggerate? We are better than that? Let me take you back, over twenty years:
“Twenty years ago [2004], on a dark February night, Chinese cockle picker Guo Binglong frantically made a 999 call, shouting: ‘Sinking water, sinking water.’ He was one of a group of more than 30 Chinese people who were harvesting cockles out on the sands of Morecambe Bay on 5 February 2004. They were cut-off by the incoming tide. It sparked a huge search and rescue effort but 23 people, including Guo Binglong, ended up drowning. The deaths exposed an underground world of cheap labour in which vulnerable migrants were exploited by criminal gangs and human traffickers. In 2006, the group’s gangmaster was found guilty of manslaughter and jailed for 14 years, external. All 23 Chinese men and women were swept out to sea as they harvested cockles against a rising tide.” (BBC News, ‘Morecambe Bay cockling tragedy victims remembered 20 years on’).
What did we do about it? Beyond criminal proceedings against those directly involved, almost nothing. The British did what they always do; wring their hands, call for an inquiry. The Gangmasters (Licensing) Act 2004 became law. Laws are relatively cheap to introduce, but what matters is the resource provided for enforcement. The resources are rarely provided, and the enforcement either failes, or (quite easily in Britain), another way is found to circumvent the law. Some official says ‘lessons have been learned’; but we all know from official inquiries, official whitewashes and Government prevarication and foot-dragging – nothing much xnges; and the show goes on, as if nothing had happened.
QED.
You raise a very good point John
The balck economy? At elast 10% IMO – and not in GDP, which may have 1% at most when last I got an official to comment
Very well put Richard. If we living in anything approaching and informed democracy , BBC would have put your questions to the chairman of the OBR. ‘Why do we have to retreat further into austerity which has got us into this mess, and cant we reform the economy so that its will sustain the spending that we need?’
But thats not the world we are living in. Someone should forward your points to the OBR and ask for a response.
Please do
https://x.com/JeremyAndrew11/status/1942874907735429248
Thanks
But, nothing about the increased spending on the military, especially increasing spending on nuclear submarines and weapons?