Stop spending the kids' inheritance

Economic
Friday, August 26, 2016
Professor Philip Booth

 

We are running out of our children's money, says Philip Booth. The Conservatives must stop the haemorrhage now

Perhaps the most crucial issue we face at the next election is that of ‘inter-generational justice’ . Left-leaning campaigners often argue against supposed cuts in the welfare state on the grounds of ‘social justice’. However, the same people are entirely unwilling to acknowledge the problem of funding welfare by imposing unsustainable burdens on the next generation. Unless the whole welfare state is put on a sustainable footing, the current squeeze will be nothing like the problems we will face in the next 50 years.

Our post-war social security systems have been constructed so that each generation promises itself benefits that will be paid for by the taxes of the following working generation. Unfortunately, low birth rates and increasing longevity can make these systems unsustainable. Not only is there no self-correcting mechanism within so-called ‘pay-as-you-go’ social security systems, the problems can be self-reinforcing. As the proportion of older voters grows, it becomes more and more difficult politically to scale back benefits. So we see, for example, the Conservative Party trying to trim benefits paid to younger people whilst promising to increase state pensions in line with the higher of wage increases, price increases and 2.5 per cent per annum – a completely absurd commitment.

This problem of inter-generational commitments is not confined to pensions. The vast majority of health expenditures occur at the end of life. Under a different system of financing we could save – or insure – during our working lives to meet some of these expenditures in later life. In our current system, we just hope that there will be enough taxpayers to finance the healthcare needs of the elderly.

The Left continually use a narrative based on the promotion of social justice to promote their ideas. Indeed, they often seem to use the term to close down debate altogether and to imply that any policy is necessarily wrong if it directly harms the poor, even if the wider effects are positive. However, the problem of inter-generational injustice that is being faced by current developed democracies transcends that of any reasonable definition of ‘social justice’ within generations.

If you project forward the UK’s public finances based on realistic assumptions, the results are alarming. The government’s own figures – produced by the Office for Budget Responsibility suggest that government debt could balloon to 200 per cent of national income at current tax rates and given current spending plans. The IEA recently published a book called The Government Debt Iceberg. The reason for the title is that implicit government debt arising from future pensions and healthcare commitments is around six times the level of the explicit government debt with which George Osborne is wrestling – roughly the same proportions as the above- and below-water parts of an iceberg.

The research in this book showed that, in order for the government’s books to be balanced in 50 years’ time, spending on all welfare programmes (health, pensions and transfers to families of working age) would have to be cut by around a half. Alternatively, the government would have to raise tax revenues by about one third. These changes would have to be implemented now, for the longer they are deferred The bigger the challenge to balance the books becomes.

This is the challenge for the next generation. Either the next government makes radical reforms to the welfare state or the next two generations of taxpayers will be landed with bills they cannot pay.

It was not long ago that we had a Conservative Party that had the intellectual imagination to tackle these problems. In both the 1997 and 2001 elections, the Party proposed a radical overhaul of pensions that would have replaced state provision by proper funded provision along the lines of that in more fiscally responsibly countries such as Australia. Similar radical thinking needs to be undertaken in the sphere of healthcare too.

Unfortunately, this government has not only failed to tackle the deficit it inherited, it has also piled up more burdens for future generations. Its public sector pension reforms have been weak; the Government has increased the state pension in various ways; and it has prevented people from opting out of part of the state pension and making their own funded provision instead.

We need politicians who will stand up for the young; we need politicians who will stand against inter-generational injustice. Mrs. Thatcher once commented that the problem of socialism is that you eventually run out of other people’s money. Modern governments have resolved this problem by adding future generations to their definition of ‘other people’. The biggest challenge of modern politics is to radically reform the welfare state and return to an economy based on intergenerational justice whereby people cannot promise themselves pensions and healthcare provision unless they are prepared to fund those benefits themselves.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs, and Professor of Insurance and Risk Management, Cass Business School, City University

This article was originally published in Crossbow, the Bow Group Magazine - Conference 2014 on 27/09/2014. Published online 26/08/2016