Trapped by debts of the past

The very idea that governments should pay off the national debt seems unbelievable
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The Independent Culture
THAT US interest rate decision last night stole the business headlines, but the most influential financial news of the week from America came a couple of days earlier. It was the White House forecast of a budget surplus this year of $99bn (pounds 62bn) with the added prospect that by 2015 the US will have paid off all its national debt.

No national debt? Rising surpluses in the future? Governments running surpluses seems odd enough to our ears; the idea that they should pay off the national debt seems unbelievable. But actually the idea of running a surplus instead of a deficit has swept across the English-speaking world. This is not just an American phenomenon. We are currently in surplus here - though the Government's plans suggest we will dip back into modest deficit. Meanwhile Canada and Australia are also in surplus at the moment.

By contrast, across continental Europe, the struggle has been to contain public deficits below the Maastricht limit of 3 per cent of GDP. Germany France and Italy are each running public sector deficits of between 2 and 3 per cent. The only significant European countries with surpluses are Sweden and Denmark, which happen (by co-incidence?) to be countries where English is widely spoken and happen (maybe also by co-incidence) to be countries which have not signed up to the euro.

Running a surplus is a long way short of paying off national debt, for there is the obvious pressure on politicians to spend the money instead. In the US, President Clinton did indeed propose to use much of the money. But he called for it to go on shoring-up medical and social security funds, both of which look like being in serious deficit in the next century as the burden of an older population puts pressure on pensions and health care.

We are now getting a Republican response from Congress, which will put more emphasis on tax cuts than on paying off social security obligations; but with luck the big message - that surpluses now should be used to redeem obligations in the future - will carry across both parties and become the new norm for US politics in the next century.

In fact, the US faces a more manageable problem than most other developed countries, thanks in part to the fact that it is "getting older more slowly" than the rest of us and thanks also to its substantial private-sector pensions arrangements. (The proportion of people of retirement age is rising in the US, but it will still be the lowest of any of the Group of Seven nations in 2020.)

So this big American idea - run a surplus and use it to fix the financial problems of the next century - is actually even more appropriate to the rest of the world than it is to the US. Paying off national debt ought just to the start. What is really needed is to build up large surpluses in social security funds, ready for the burdens facing the next generation.

I don't think our politicians have really begun to think in these terms, and it is enormously to President Clinton's credit, whatever you think of the chap himself, that he should be doing so. If ideas about governance travel through culture and language rather than physical proximity, as increasingly seems to be the case, then the rest of the English-speaking world will be swept along. This could be a big idea whose time has come.

For centuries, governments have borrowed from their citizens and have either paid back those debts from future tax revenues or occasionally just defaulted and bunked off. Why should things be different now? The answer comes in two parts. The first is that the governments of previous generations have almost always been able to rely on rising populations and growing economies. So the burden built up by one generation has been relatively easily paid for - or at least the debt interest serviced - by the next one. The transfer of wealth between generations has been small.

The second is that debts in the past have, almost invariably, been built up in times of war. So the children of the wartime generation, the beneficiaries of the war (assuming the war was won!), have paid back the debt to their elders, who had to do the fighting.

But the deficits built up by governments in the last 30 years have been to pay for higher pensions, better social services and so on. The result has been that a typical person retiring now in a developed country will receive during his or her lifetime about pounds 100,000 more in benefits than has been paid in tax. By contrast, people entering the workforce now, aged 18-23, will pay about pounds 100,000 more in tax than they will get in benefits.

Within 20 years, instead of public spending being able to provide good value to taxpayers, it will inevitably provide bad value. This simple mathematical fact, the result of a tension between large state-welfare systems and an ageing population, changes the political equation in two profound ways.

First, however hard they try, politicians will find it hard to give good- value government. Second, the relatively small numbers of the young will be pitted against large numbers of the old.

The voting power of the old, who benefit from high public spending, will clash with the earning power of the young, who have to pay the bills. The new fissure in politics will not be between left and right, but rather between young and old. The young will vote for lower taxes; the old will vote for higher pensions.

President Clinton, the first baby-boomer president, can see this. Thanks to the long American boom, which has helped contain social security spending and increased tax revenues, he also has an opportunity to do something about it. He can ease these future tension by paying back public debt now, while the baby-boomers are still in jobs and are therefore net payers of taxation. Getting public finances into shape is a race against time.

Can it be done? Here I am more gloomy, not because I fear that governments, given a pot of cash, will always find ways of spending it, nor even because democracies find it very hard to think about the interests of people five years hence, let alone 30 years.

No, I am gloomy because I don't think the projections for the US surpluses will prove correct.

We here had a substantial budget surplus in the late 1980s. It was perfectly possible to predict that we, too, would soon have paid off the entire national debt. And we blew it. We ran a deficit of up to 7 per cent of GDP in the 1990/92 recession in a vain attempt to keep the economy moving. The debts were built up for little or no purpose, for in the end it was leaving the European exchange rate mechanism that kick-started growth. But the idea that governments should spend more to try and stimulate economies in recession is deeply rooted and hard to change. Japan is running a deficit of nearly 10 per cent of GDP in a similarly vain effort.

So when the US economy turns down, as eventually it is bound to do, the grand projections of surpluses-for-ever will, I fear, turn into nail-biting about rising deficits. We may have to go through yet another economic cycle before the idea takes hold that government should not just balance their budgets, but that when they run a deficit, any deficit, they are building up a burden which will have to be carried by the children and the unborn.

But maybe I will be proved wrong. Maybe politicians will recognise that fiscal deficits are bad not just for the financial reason that the debts will have to be repaid by a smaller group of working people, but also for the moral reason that we have no right to put a burden on our children.

Maybe paying back the national debt will become politically fashionable -the big idea to which all parties subscribe - in the English-speaking world, then beyond.

If so, then we will have had the combination of the long American boom and the communications powers of the strange, flawed, talented President Clinton to set us on the track.