Thread: Britons will be poorer in coming decades

Britons will be poorer in coming decades

Britain's economic crisis is still with us and is going to worsen. Some unpleasant medicine will have to be taken.

By Edmund Conway
Published: 11:38PM BST 11 Jul 2009

Chances are you are already bored to death with the endless debate on public spending and the fiscal deficit. For weeks, Labour and Conservatives have traded blows in Parliament over the extent to which the other will cut its spending plans. The next chapter is likely to concern tax rises, as the Tories lay into the Government for hiding their planned increases after the election. But, like it or not, the budget and its parlous state will remain one of the most contentious and hotly-debated topics next year.

The reason is very simple. The combined effect of the financial crisis and recession has been to generate a deficit the likes of which has not been since since the aftermath of the Second World War. Britain's total public sector net debt will be catapulted from a level of below 40pc last year to around 80pc or perhaps 100pc and beyond.

In part, this is due to the extra cash needed for unemployment benefits, bailing out stricken banks such as HBOS and Royal Bank of Scotland and temporary Keynesian tax cuts and spending increases. But the greater part of the black hole is due to the fact that a massive chunk of the tax revenue the Government assumed would keep flowing into its coffers has simply dried up, mainly because the golden goose that was the City is no longer so prodigious.

The economic gravity is irresistible. Whoever wins the next election will, whatever their manifestos say, have to inflict swingeing cuts on public spending or raise taxes significantly. Whereas in previous years Gordon Brown could get away with borrowing more each year to keep his Budget ticking over, this option is now under the most severe threat since the mid-1970s, when Britain was bailed out by the International Monetary Fund (IMF). Ratings agency Standard & Poor's has warned that unless Alistair Darling finds "more ambitious" fiscal plans, it will probably cut the UK's credit rating.

If it does so, Britain faces a slippery slope of ever-increasing interest costs on its debt, a growing struggle to raise finance from international creditors and, if matters deteriorate further, the prospect of a full-scale financing crisis.

According to Ray Barrell, chief UK economist at the National Institute for Economic and Social Research, Britons will have to come to terms with the fact that the UK will be poorer in the coming decades.

"This means there's a strong case for cutting back on public sector investment beyond the already weak projection in the Budget," he says. "I can't imagine we'll see as large a programme of public investment as people expect – which means that things like Crossrail [which is estimated to cost around £16bn] and nuclear weapons system Trident [whose replacement cost is estimated at £40bn] are under major threat, whichever political party is in power."

However, although cutting investment projects such as these or the introduction of ID cards will help bring the total net debt figure down, a more pressing need is to bring current spending, the outflow of annual cash for existing public sector programmes, down. After all, Crossrail and Trident aside, the Government is already planning a massive cut in investment in its current Budget plans. According to John Hawksworth of PwC, the Government needs to find a further £22bn in savings or revenues by 2013-14 in order to bring the current budget back in balance by the end of the next electoral term.

To do so would involve some major sacrifices, he says: "If you did everything by cutting spending and raised no extra taxes, our estimate is that departmental spending might need to be cut by 11pc in real terms by 2013."

The Institute for Fiscal Studies predicts a slightly more modest squeeze of 7pc but both would represent public service cuts of a type never before achieved by a UK government. Although the Thatcher government cut the size of the state, partly through privatisations, it balked at the challenge of imposing cuts such as this on its core welfare state functions.

The Sunday Telegraph has mapped out three possible paths for public spending and taxes. They underline the scale of the potential tax rises or spending cuts that would bring the budget back towards balance - and even then only within five years. The plain fiscal logic is that there is no easy way out of this.

Moreover, the impact of the recent crisis is only one half of the issue. The UK also faces a more serious long-term crisis, thanks to its demography. The ageing of the population, in conjunction with the effect of imprudently generous pensions policies, means Britain's national debt could rise yet further to 200pc of GDP by 2050, according to S&P calculations. NIESR's Barrell says this means it is essential to tackle the impending black hole as soon as possible, by putting in place plans to increase the retirement age for both men and women to 70, within the next decade. Although the upshot of Lord Turner's pensions report was that the state pension will eventually be awarded only above the age of 68, these reforms are due to come in completely only within four decades. Barrell's proposal is to bring in the increase far faster.

"Working longer makes a lot of sense and will cut the deficit," he says. " Society has to decide we will all work longer. Then we will have the tax revenue to help pay off the debt. It's not a quick solution. It raises revenue only slowly and cuts pensions costs only slowly but will ultimately bring the books back into balance."

It also has the advantage of not imposing a potentially economically damaging tax rise as the UK emerges from recession. However, the likelihood of either political party supporting such a proposal is highly doubtful.

http://www.telegraph.co.uk/finance/fina ... cades.html

ummm.....sounds like home!!