You just know The Guardian\’s Mythbuster series is going to be awful, don\’t you?

When you see this at the bottom:

This mythbuster is part of a series co-ordinated by the New Economics Foundation and the Tax Justice Network.

Their argument is that because the national debt isn\’t as high as it was during the Napoleonic Wars nor WWII then the UK isn\’t bust.

Except…..

Major Attlee ran budget surpluses to pay down some of that debt. That would be nice around about now, wouldn\’t it? And those two times we did have the excuse that we\’d just fought wars of national survival. I suppose you could say that the Brown Regime was of equivalent awfulness but that would be an odd position for the Guardian to take. Other than that, what\’s the excuse this time?

47 thoughts on “You just know The Guardian\’s Mythbuster series is going to be awful, don\’t you?”

  1. But the Guardian/Guardian readers usual defence is that Brown wasn’t a true socialist so using him as a bad example of a chancellor doesn’t work.

  2. The Napoleonic War debt was hefty, per capita, and took a long time to pay down. One of the reasons it became more manageable was the increase in UK population. To put this in perspective it rose from under 16 million people in 1815 to 26 million some 50 years later, and over about 40 million by the turn of the century.

    There was also a big chunk of Industrial Revolution to boost GDP per capita. Is anything like this around the corner now? Even the IT Revolution doesn’t seem to have boosted the productivity and growth stats substantially (I am sure Tim used to mention this more often, but see eg http://en.wikipedia.org/wiki/Productivity_paradox ) and that isn’t good news for the future scale of the debt burden.

  3. One should ask the foaming at the mouth idiots, Where was the world war which caused the debt?

    No answer do they have.

  4. Ah, but you forget that Gordon Brown “saved the world” in 2008 so we must expect to have a bill the size of Pitt’s or Churchill’s.

  5. Hi John, I think you are wrong to pick on our glorious Labour PM Gordon Brown.

    The real blame for the mess rests with Sir Francis Drake, reputedly a conservative, who went out to ‘find the world’ which poor Gordon had to save.

  6. Historically the UK government did not have substantial off balance sheet liabilities. This is no longer the case. UK underfunded state pension liabilities is on the order of 300% of GDP. Note that some of this could be taken care of via growth and some from lowered payments and increased contributions. But the pensions crisis will be enormous. (It’s worse in other developed countries).

    http://www.ons.gov.uk/ons/rel/pensions/pensions-in-the-national-accounts/uk-national-accounts-supplementary-table-on-pensions–2010-/art-mainarticle.html#tab-Key-points-summary

    And since I assume no one wants to return to capital controls (ok the moron murph does) and to rationing (what happened the last time when debt was 250% of GDP), there is no money…

  7. You are confusing two issues.

    Number 1, is Britain bust? No, patently not. That is (mainly) what the piece says.

    Number 2, should the govt now be doing austerity/running surpluses/whatever? A reasonable matter for debate, involving a number of factors, not just the current level of debt/deficit.

    It makes no difference to No.2 whether we are in the current position because of wars, incompetence or bad luck. That is just repeating the old joke about not starting from here (or being a party hack).

  8. @Luke “It makes no difference to No.2 whether we are in the current position because of wars, incompetence or bad luck. ”

    Luke, you’re perhaps correct if you are talking in terms of pure economics (though it’s always wise to look at the past as a guide to the present and the future).

    But I think we can accept that an alliance of The New Economics Foundation, The Guardian and The Tax Justice Network will have more than a little political axe to grind (and very little understanding of the economics).

    In this case, they seem to be using historical exigencies and wars for national survival to justify the modern lunacy that is the British public sector.

  9. “That is just repeating the old joke about not starting from here”

    Its a newer joke when the here you start from next time is even further from where you would like to get to? Think I prefer the old gags.

  10. Ken, a good point, but….can you or someone else explain why people bang on about unfunded pension liabilities? I can see it is an issue, but we have all sorts of unfunded liabilities. Army, schoolz n hospitals, roads, police, judges, other benefits. No one (maybe Tim) is suggesting that govt expenditure will ever be zero.

    What makes pensions so unique among government expenditure? In practice, it seems just as difficult to reduce other expenditure (OK, not capital expenditure). Pensions are not absolutely fixed. Thatcher cut them by linking to RIP instead of earnings. Gideon reduced by increasing the retirement age. Without going into Laffer stuff, the tax take is not absolutely fixed.

    And what is so magic about funded pensions? Say I have one (working on it). When I retire, I take an annuity funded by…govt gilts, which are funded by taxes. OK for me, but I am still (indirectly) relying on taxes/other peoples work. And if a huge proportion of the population retired today with fully funded pensions, who would fund those ongoing payments? Would it not be the remaining taxpayers (or workers whose companies profits go to the pensioners)?

    An ageing population is an issue. But how are fully funded pensions a solution for the country as a whole, rather than the individual. Nor do I see why, of all the things we can expect the state to be paying for in 20 years out of tax, pensions are so uniquely problematic.
    Help please.

    Puzzled of North London.

  11. Luke, the dmographics (to which you allude) are horrible, plus pensioners vote, and, while you can always trim the size of the Army etc, starving old folks isn’t going to play well with anyone (and rightly so).

  12. What makes unfunded pension liabilities (and medical bills) so special? It is usually the sheer scale of the underfunding. Schools, army etc tend to be about the same as the previous period. Pension liabilities and healthcare costs are not fixed in stone, but they tend to be difficult to renege on outright.Note that these numbers are after the government bravely cut the bill by raising the retirement age – unlike the toerags of Labour, who knew the problem but ducked it. Always remember labour were fcuking useless and ducked every difficult decision.

    If we take the 300% of GDP number and divide over 50 years, this means that the level of outgoings vs. tax will be 6% (real back of the envelope numbers) a year. This is on top of what we already spend.This is more than the whole education budget, twice the defence budget.

    There is a school of thought amongst some economists that say we need not worry about expenditures of this sort since the government can tax and economies grow. To some extent this is true, since the ability to tax is very powerful. But, taken to its logical conclusion, it would mean there is no limit to government debt levels, which is patently untrue. (Otherwise Zimbabwe would be a paradise and hyperinflation an impossibility).

    Since we cannot rely on financial repression, capital controls and rationing, debt levels seen after major wars are not going to be sustainable. Is the present level of debt sustainable? Possibly, but the answer to a debt crisis is rarely to be found in more debt.

    The eventual solution to all of this will be inflation, lots of inflation. reducing liabilities, both of debt and of pension obligations. Politically far more palatable than admitting the governments cannot pay.

  13. @Ken “There is a school of thought amongst some economists that say we need not worry about expenditures of this sort since the government can tax and economies grow. To some extent this is true, since the ability to tax is very powerful. But, taken to its logical conclusion, it would mean there is no limit to government debt levels, which is patently untrue.”

    You have nailed it here, Ken.

    The problem is, lots of people – and in this case it does tend to be those on the left, thoughy in othereas the right are just as emotional – think this is about “vile” or “evil” “Tories” who “hate the poor”, when really it’s just a simple and immutable matter of economics.

    If something is inevitable, that means it will happen.

  14. “Luke, the dmographics (to which you allude) are horrible, plus pensioners vote, and, while you can always trim the size of the Army etc, starving old folks isn’t going to play well with anyone (and rightly so).”

    Its just been tried in Mid Staffs and definitely didn’t go down.

  15. Ken, Interested. Thanks. I agree that an ageing population could present a problem. Less workers supporting more pensioners.

    But that is still the case if we have *funded* pensions. How do funded pensions go to reduce the proportion of UK wealth (or earnings) that gets spent on old people, however deserving they are, and however prudent they have been in saving for their old age?

    My query is not really about demographics (on which I see the potential problem), but about what is so special about *unfunded* pensions and so magic about *funded* ones.

    Tim adds: At the sort of level that you’re talking about there’s only one difference. Funded pensions you can see. You can see what you’ve got to pay and you can see that you’ve got enough to pay it.

    Unfunded pensions just sort of wander around in the aether. For example, from the numbers above the “unfunded” state pension is going to take 6% of GDP into the future. So, if we’re to be honest, we need to take 6% of GDP off the table before we start talking about anything else. How large should the state be, how high should taxes be, should we bring in new benefits or not: all should be beginning from the starting point that we’ve already set aside 6% of GDP to pay something already promised. Even if that 6% is the wrong number that logic still holds.

    And we should be doing the same with other unfunded liabilities….public sector pensions for example. Nuclear clean up costs perhaps. Etc, etc etc. For what we’ve already promised to pay constrains our ability to do anything else. And thus it’s a damn good idea to know what those constraints are.

    That’s about the only difference but it’s an important one.

  16. Tim’s beaten me to it. The ‘unfunded’ bit allows politicians to lie, basically.

    The true picture of our national finances is very scary, but the media largely only reports the visible stuff.

  17. the government bravely cut the bill by raising the retirement age – unlike the toerags of Labour, who knew the problem but ducked it

    That’s false. The Pensions Act 2007 raised the State Pension Age to 67. (The present government has published a draft bill bringing the change forwards 10 years.)

    Has anyone got a serious proposal for funded State Pensions? What would we invest the fund in?

  18. Actually Luke asks an important question – what is the difference between funded and unfunded pension schemes.There is perhaps less difference than one might think.

    It isnt just a matter of whether you have to take 6% of GDP to pay the pensions, but what is the asset that is accumulated to pay the pension.

    In a closed economy, the accumulation of wealth to pay for retirement represents a cost to the next generation as the young must now pay for the assets of the old, so that the old can retire. It has been proposed that this is no different from taxing the young, without the accumulation of assets.

    The asset that the pensioners in an unfunded scheme are accruing is phantom government debt (which is a pretty safe investment), that then needs to be funded by tax. Alternatively, the pension could have been invested in a house, that must then be purchased by the young. If there are many pensioners relative to young, then the price of houses fall, meaning that the pensions are not all that they might have been.Thus similar to the problem caused by few young taxpayers in the unfunded example.

    This ignores the issues caused by an open economy (you can invest overseas) and also positive externalities from a funded scheme – if for example it is invested in equities that go to fund risky but productivity enhancing projects. One of the reasons why some economists like unfunded pension liabilities is that they are (relatively) safe and are insured against many possible risks. There are OTOH also political problems with unfunded schemes – the temptation to promise too much.

  19. PaulB,

    Whoops, Labour (mainly) ducked the underfunding of government employee pensions – leading to the teachers and others striking now.

  20. There’s nothing intrinsically wrong with funding pensions out of taxation as long as the politicians don’t pretend that they’re funded from the magic money tree and account for demographics when setting rates (including explaining to the electorate that they can’t continue to retire at 65 (or 67) when a lot of them will live for the next 30 years.

  21. The UK does not have a pensions problem, in reality. The actual problem is that the retirement age is about 5-10 years too low, at a minimum. It’s not just an issue with the state pension, but with all pensions. If people want to save enough to retire younger than the state pension age, that’s up to them.

    Basically, it’s the usual story: the Most Selfish Generation in History(tm) is refusing to stop sucking the blood from their kids and grandkids, because they promised each other that they’d get to retire young.

  22. Thanks again for helpful comments.

    Ken, I had half thought of the positive externalities point you raise, though in a less coherent way. I can see the point about overseas investment in particular. But my (half baked) concern is that when, say, Brazilians find that they are in reality working for British pensioners, they will switch jobs. Or in some way capitalise on the fact that their labour is in demand, whereas UK pensioners capital is looking for a home.

    I have not thought through the mechanics of how that would happen, and it might be bollocks. Thanks anyway.

  23. @ # TJGM
    Sir Francis Drake pre-dated the creation of political parties and certainly wasn’t a “conservative” with a small “c” as that role was occupied by Philip of Spain.
    Conservative with a large “c” are very different from the Luddites in Unison/Unite/Labour.

  24. @ #19 PaulB
    Education for those capable of benefiting from it (e.g. spending more than one-quarter as much on my genius-level elder son as on my autistic younger son), and capital investment to raise the productivity of factory workers so that the UK could compete with China on selling into Europe (where transport costs partially offset wage differentials) and the balance invested (like Kuwait or Norway) where the benefit of capital investment in developing countries will provide major benefits both to the country and the investors. As Aleksandr Orlov would say “Simples”

  25. @ #11 Luke
    It would be easier to have a rational debate without your irrational attacks on Mrs Thatcher. Deciding to maintain the real value of pensions by increasing their monetary value in line with RPI (NB not RIP, she is still alive) is NOT decreasing them under any definition in the Oxford English Dictionary.
    Getting back to the original point: the Grauniad is lying about the comparison of UK government debt now and in 1815. It is not just that the debt ratio would be trebled or quadrupled or more (depending on your assumptions about mortality and economic growth) by including contractual liabilities for old age pensions and unfunded civil service pensions: it are excluded
    I actually have a funded pension after working for 40-odd years (sadly the DB part only covers 22 years so I am waiting for interest rates to become positive before drawing on the DC part) and I know that gilts are a nearly trivial part of the investments backing my DB pension (for a couple of years I was responsible for checking computer records of investments – a decade after I stopped programming but the incompetent IT manager still complained about me). The only investments in gilts were a side-effect of the tax benefits of a portfolio of gilts for the taxable portion of the fund where tax losses could be claimed on gilts sold after 364 days but gains on sales after 367 days were tax-exempt. The vast majority of the investments of my deferred income were to produce income in the future that was significantly greater than the cost of the investment – enough to pay tax and still give a return of 3% (that deemed in my youth to be needed to encourage saving instead of immediate spending) after tax.

  26. Dave, I think I’m getting confused but isn’t the fact that the retirement age is 10 years too low and is politically infixable basically the problem ie there is a problem, and that’s what it is?

    otherwise, it’s a bit like saying the reason my car won’t run is not because there’s no petrol in it but because the petrol is five miles away and i have no way of getting there. Sort of, but they amount to the same thing?

  27. John 77. I did not intend to attack Mrs T, merely to point out that state pensions are not an absolutely fixed liability. (Same goes for private pensions – one of my former employers shut its DB pension, for everyone. Like most private sector workers under 60, i have no DB pension.) As an aside, if your pension was not invested in gilts, that was a massive opportunity loss.

    You have missed my point. You are relying on others to work while you do not (not unreasonable for an old person). What if current workers come up with some sophisticated argument like – get lost, grandad? Not nice, not moral, but attractive if each worker is supporting loads of pensioners with their supposedly funded pensions.

  28. These huge debts and liabilities have been run up in the past because there was future growth to pay for it…but with all three parties wearing the Green hairshirt, where is this growth coming from?

  29. For the avoidance of doubt, I am an optimist and do not believe that current debt/deficit means that we are all doomed. Nor do I believe pension entitlements mean that we are all doomed to perpetual slavery just to fund John 77s lifestyle. Just trying to clarify my own understanding.

  30. Interested>

    The ‘problem’ is not that we can’t afford to pay a state pension, as is commonly portrayed, or that the ‘underfunded’ private-sector schemes can’t afford to pay for a decent retirement – it’s solely the length of retirement which is a problem.

    It’s important to differentiate between an economic problem and a political one. The true solution is then obvious, despite the attempts to obscure it.

  31. Now, dealing with Luke’s other ignorant misapprehensions.
    If he had a DB pension before his employer closed the scheme to future entitlements he still has a DB pension unless he voluntarily surrendered it.
    tHYE RETURN ON EQ

  32. I have no idea what the website has done.
    My DB pension does NOT depend upon the return achieved by the pension scheme on its investments (except to the extent that it achieves significantly above-average returns so that it can match inflation instead of 3% when upgrading payments) The return on equities and on property since 1968 has been far greater than that on gilts so the “massive opportunity loss” is a figment of Luke’s left-wing imagination. For Pete’s sake risky investments have to provide a higher return than gilt-edged

  33. For the avoidance of doubt, the taxpayer makes no contribution whatsoever to my lifestyle. I pay tax which far, far exceeds the winter fuel allowance that I receive. I am not in receipt of the old age pension. The tax rebates on my pension contributions are less than the tax I pay on my earnings.
    My DB pension started 40 years after I started work with my ex-employer.
    If there a good reason why I should not get offended by the lying insults from lefties?
    If I could believe that they were all just mentally deficient, I could accept that I should put up with it but David Millionaireband’s ‘A’ level results are not sufficient to convince me that *all* lefties are stupid.,

  34. @ #32 Dave
    No, No, No.
    What matters on pensions is the rate of return on investment (aka capital). In 1997 Enoch, Elijah or Methusaleh could have purchased an annuity giving a higher annual income per

  35. So Much For Subtlety

    Luke – “Number 1, is Britain bust? No, patently not. That is (mainly) what the piece says.”

    Yet. The problem is that the system in the UK is opaique. We do not know if we are bust or not. We are clearly edging towards it and if liabilities are hidden, we will not know until we are over the edge and suffer a meltdown.

    “It makes no difference to No.2 whether we are in the current position because of wars, incompetence or bad luck.”

    Of course it does. It is vitally important. If failed policies and fail politicians of the past destroyed the fragile standing of the British state, then we need to know so that we do not repeat such policies or elect such leaders. Knowing where we have gone wrong and learning our lesson is vital. It also matters for helping to decide if the correct solution is a round of hangings or to soldier one.

    11Luke – “can you or someone else explain why people bang on about unfunded pension liabilities? I can see it is an issue, but we have all sorts of unfunded liabilities.”

    Because we do not know how much we owe, too many governments have used it as a way of handing out our money to their favoured constituencies while keeping it off the books, it is not properly subject to democratic accountability, it is too easy to abuse, and above all, it is a way of stealing from our grandchildren. Why should they have to pay for the civil servants of today? If we want lesbian bereavement officers, I would suggest that we ought to pay for them. Not future generations. Now if they were going to be fabulously more wealthy than us, that would be worth doing, but let-s face it, they aren-t.

    Also by failing to save, we fail to provide proper levels of investment. We ought to save more.

    “What makes pensions so unique among government expenditure?”

    They are promises that bind the taxpayers of the future? Unlike spending on schools and stuff. No one is arguing for zero government spending – apart from Ian B I guess – but pushing debt on to future generations without good cause is just wrong.

  36. What if current workers come up with some sophisticated argument like – get lost, grandad?

    I can see this very thing happening. At some point, the younger generations are going to wonder why they are massively in debt, unable to afford a house, and are giving up a huge chunk of their earnings to support a group of people who sit about in very expensive houses doing fuck all. It’ll be yet another drain on the productive classes, who will increasingly vote with their feet and clear off elsewhere.

  37. Interested: “There’s nothing intrinsically wrong with funding pensions out of taxation as long as the politicians don’t pretend that they’re funded from the magic money tree and account for demographics when setting rates (including explaining to the electorate that they can’t continue to retire at 65 (or 67) when a lot of them will live for the next 30 years.”

    Coupled with this:

    Luke: “What if current workers come up with some sophisticated argument like – get lost, grandad? Not nice, not moral, but attractive if each worker is supporting loads of pensioners with their supposedly funded pensions.”

    Has had me thinking recently (there’s nothing like getting past 55 to concentrate the mind on pensions).

    In the post war WW2 period younger generations have looked at pensioners and seen rows of medals and understood that the pension is, in a big way, paying a debt for sacrifices made and freedoms won. Freedoms being enjoyed by those younger generations. Indeed a lot of out modern culture is based on that very notion.

    However, as the generations that fought the war die off and are replaced by those who didn’t the discussion could well change. As Luke says, future generations may well look at pensioners in their big houses etc and start to ask: what did you do for us? Indeed I feel that is starting to happen as my own son has raised the point, not in any nasty way but more as a query about the way the economy is going, but it could get nastier as pensioners increasingly get seen as a generation who ran up government debts for their own benefit.

    As for Thatcher’s role in the pensions debate: all I remember is her banging on, ad nausea at times, about the problem of future pensions and the demographic time bomb, but the press and other commentators including her own party sticking their fingers in their ears whilst screaming “I’m not listening lalalala”.

  38. @Tim Newman
    It s entirely predictable & has been for years. It s in the demographics.
    UK works on the assumption the State is responsible for looking after its elderly. Many of the people who have immigrated to the country over the past few years cleave to the idea its the family s responsibility. At some point their children will find they are paying for both their own elderly & the State s elderly & vote accordingly.

  39. So Much for Subtlety

    Tim Newman – “At some point, the younger generations are going to wonder why they are massively in debt, unable to afford a house, and are giving up a huge chunk of their earnings to support a group of people who sit about in very expensive houses doing fuck all.”

    It is going to be worse than you expect because of the demographic changes. America has had cities go bust and invariably they are now minority majority cities. That is, they used to be majority White and now they are not. Which means non-White young people are asking why they should pay taxes for older mostly White people.

    Britain is going to end up in the same boat and I can see the “No cash for racist Imperialists” argument going down well.

    42 SimonF – “In the post war WW2 period younger generations have looked at pensioners and seen rows of medals and understood that the pension is, in a big way, paying a debt for sacrifices made and freedoms won. Freedoms being enjoyed by those younger generations. Indeed a lot of out modern culture is based on that very notion.”

    I do not think that is what happened in the post-War World. On the contrary, I think the Sixties generation were utterly contemptuous of the War generation. It wasn’t until the 1980s that the 68ers children became interested once more. The Sixties generation mocked and said there was no difference between Hitler and Churchill.

    But either way, we have done this experiment because the War Generation paid for the war in part in bonds. Which were not paid back. Essentially the government allowed inflation to rob those that lent money to the war effort and the War generation got nothing. There is no reason they will not do it with pensions either.

  40. Me:

    Has anyone got a serious proposal for funded State Pensions? What would we invest the fund in?

    john77:

    Education … and capital investment to raise the productivity of factory workers

    So you’re suggesting that the government should cut some large sum from its annual spending, representing the incremental present value of its pension obligations. And then invest the same sum in education and capital investment in productive industry (this would be the government picking winners, I suppose).

    Then when the pensions come due, it will pay them out of what pile of money? How is this different from an unfunded scheme?

    I’m making roughly the same point as Luke. Whatever financial arrangements are made, a pension is a claim by the unproductive on future production. The only way to avoid this (from a UK viewpoint) would be to create a sovereign wealth fund which invests a (huge) pension pot overseas, so that pensions become a claim (which we hope will be honoured) on overseas production (which we hope will be sufficient).

  41. @ PaulB
    “Then when the pensions come due, it will pay them out of what pile of money? How is this different from an unfunded scheme?”
    The pile of money is the increase in the earnings of the workers, UK and overseas, resulting from the investment.
    The difference from an unfunded scheme is the aforesaid pile of money.

  42. @Dave “It’s important to differentiate between an economic problem and a political one. The true solution is then obvious, despite the attempts to obscure it.”

    Thanks Dave. I think then that we agree, except that I see the politics as an essentially inoperable cancer, inseparably intertwined with the arteries of economics. To extend ge medical metaphor, I think the death of the patient will inevitably follow!

    @PaulB Where is the money for this enormous sovereign wealth fund coming from? Given that your side of the argument believes in spending billions more than we earn, are you suggesting we borrow to invest?

Leave a Reply

Your email address will not be published. Required fields are marked *