Five ways George Osborne will fail the next generation
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Version 0 of 1. Light-sabre wielding George Osborne says he is fighting for Britain’s future generations. Central to his Mansion House speech was a warning that unless the state runs a budget surplus in normal times, a toxic legacy of debt awaits our children and grandchildren. The chancellor, who let it be known last week that he is a Star Wars fan who keeps several replicas of the Jedi weapons in his office, said that for the sake of future generations “governments of the left as well as the right should run a budget surplus to bear down on debt”. Addressing the assembled City grandees, Osborne was echoing comments by the prime minister, David Cameron, before the election, when he said parents and grandparents must “look at the children you love” and save them from a “legacy of huge debts”. The subtext of Osborne’s speech was clear: a return to Labour’s policy of running deficits – even those under the banner of “borrow to invest” – would undermine the public finances. Yet much of what Osborne does favours the old at the expense of the young. A look at five policy areas shows how: Related: Growth at all costs: climate change, fossil fuel subsidies and the Treasury More broadly, creating a budget surplus is more about protecting today’s older taxpayers, many of whom already have the infrastructure they need to see out their days. Osborne scared boomers with Britain’s escalating level of debt, which has doubled from around 40% of GDP in 2006 to 80%. But this level of borrowing by a national government is not bad in itself; it depends on who you borrow from and your ability to pay the interest. The UK’s 80% is less than the Japanese (220%) and sits between France and Germany (96% and 71% respectively). The Japanese, like the Italians (who support a 120% debt to GDP ratio), borrow largely from their own savers. The UK has traditionally borrowed mostly from international investors, though today around a third of its debt is owned by the Bank of England. Much of it is long-dated (which means it comes up for renewal infrequently) and enjoys a historically low interest rate. This means there is virtually no threat to the UK’s status as a safe haven. An experiment that proved this was run by Jonathan Portes, head of the National Institute for Economic and Social Research. He looked at the cost of UK debt financing before the election when markets, like most observers, expected a coalition government of some kind, most likely led by Labour. When a Tory victory was announced, the bond market, where government debt is bought and sold, was expected to leap for joy. It did not move – the conclusion being that the difference between a small deficit to fund investment under Labour and surpluses under the Tories left them untouched. Related: Academics attack George Osborne budget surplus proposal Osborne failed to make the point that a government determined to save more than it spends is going to shrink. As a group of academic economists pointed out at the weekend, cutting back on spending to produce a surplus in the public finances shifts the burden of borrowing to businesses and households to maintain the current level of GDP. The Office for Budget Responsibility expects household borrowing to climb back above its former peak of about 170% of GDP by 2020, from a low of 135% after the 2008 crash. The Whitehall independent forecasting unit has made it clear that much of the UK’s GDP growth throughout this period would evaporate were it not for this increase in borrowing. The question must be: how good is the surplus for the next generation if it has to borrow to pay for living expenses and invest when that could be done by the government – which can borrow at much lower rates and has plenty of jobs to do. Cutting public services to achieve a budget surplus will also have the effect of depressing growth below what it might have been if the government was to maintain a small deficit for investment. Lower growth will force the Bank of England to maintain low interest rates. At the moment, Threadneedle Street is expected to begin raising base rates next spring, from 0.5% to a maximum of 3% over maybe two to three years. Lower interest rates will encourage investment in risky assets and property in particular, where regulations are being weakened and taxes on ownership are low. This drives up property prices and creates an expensive asset only the richest young people can afford and a repeat of the 18-year cycle of property crashes Osborne pledged to eliminate. How can sowing the seeds of the next crash be of benefit to the young? |