I often come across good stuff on the interweb while I’m looking for something else. Last week, I found a paper entitled Assessing a Government’s Exposure to Fiscal Risk by Peter S. Heller, formerly of the IMF and now Professor of International Economics at The Johns Hopkins University. It contains a number of long-term projections for government debt in the advanced economies, all telling a similar story. These figures were taken from a European Commission forecast:
Projected Evolution of Debt Levels up to 2050 (as a percentage of GDP)
The projections are based on the assumption that government policy on welfare entitlements, the provision of public services and taxation rates stays the same. In other words, that any increase in cost is met through extra borrowing. These figures show the debt positions of the three largest European economies looking shaky by 2030 and dangerous by 2050.
But now here’s the really interesting bit. These projections were taken from this European Commission report which was published in 2004. Before the financial crisis, before people even imagined that anything so serious was going to happen, a large gap between spending and tax revenues was predicted to open up for most western economies, sometime in the 2020s.
As it is, the financial crisis has made things even worse. The IMF and OECD forecast that the UK’s debt will be where the European Commission thought it would be in 2030 by about 2013. Thereafter, it is predicted to fall,. at least in the short-term, as the economy grows but we will still go into the 2020s with a higher public debt than anyone could have imagined back in 2004.
This makes the problem that bit more urgent and gives the government less room to manoeuvre than it would otherwise have had. The LSE’s Professor Howard Glennerster reckons that demographic pressures and the costs of climate change will, during the next two decades, increase the amount that the government needs to spend. If fiscal policies stay as they are, he argues, there will be a gap between spending and revenues of 6 percent of GDP by 2030. NIESR’s projection, earlier this year, was 6.5 percent.
That a gap between government revenues and spending was opening up in western economies is something that has been known for sometime. Left-wingers blame the bankers for the mess we are in and right-wingers blame Gordon Brown. But, though the recession has made the public finances much worse, we would have had to deal with the widening gap between spending and revenue sooner or later.
We have three options; raise taxes, increase our debt or cut the cost of social provision and public services. The solution will probably be a combination of all of these. Britain will be a place of higher taxes, higher debt, less generous welfare provision and pared down public services.
Some of those on strike today may want the public sector to stay the size that it is now, with the pay and benefits that it currently provides. But it can’t and it won’t. Sooner or later, the cost of public services has to come down. If this government doesn’t manage it, the next one, whoever they are, will have to.