MEA CULPA – BEWARE THE STORMS BEYOND

BILL JAMIESON

In business as in life, to despair is a sin. But to turn a blind eye to events that could threaten our economy and livelihoods is an equal wrong.

In the past month I have given three presentations to different audiences on prospects for Scotland’s economy.

I’ve sought to balance the threats with the opportunities, the weaknesses with our strengths and signs of weakness against clear evidence of success.

I’ve talked about the worries over Scotland’s budget, the sharp retrenchment in the North Sea oil sector, business fears over higher taxation, and signs of a slowdown in the overall pace of growth – just when we need to see a fundamental acceleration.

But I’ve talked too, about our record level of numbers in work, our business start-up rate, our inward investment successes and our capital spending plans.

In each case, my brief was to focus on prospects for Scotland’s economy post the referendum and the stunning general election triumph of the SNP: where we are and where we are headed.

Inevitably the talks were coloured by the unexpected Conservative victory, the immediate release from the worry and uncertainty of a hung parliament and the subsequent boost to business confidence.

Looking back at my notes, I now have doubts that the future may not be quite as sanguine as I have left audiences to suppose.

The problems are twofold. First, the requirement to keep a tight focus on Scotland’s economy works to exclude the likely impact of external events and developments over which the business community and government – whether at Holyrood and Westminster – have little control.

And second, by concentrating on the immediate outlook, concerns over longer term threats are all too easily skated over or minimised.

So here’s my corrective: two deeply concerning issues that are likely to have a major impact on our lifestyles, business prospects and well-being – bigger than any “Barnett consequential” or fiscal autonomy effects.

The first is an issue of which we are well aware but find difficult to admit or accept: that for the first time since the Second World War children are destined to have a lower standard of living than their parents.

This issue of generational living standard decline is so diffuse and slow in realisation it is pushed down the list of policy concerns. But it is very real. And its most immediate and troubling manifestation is the enormous pile of debt with which today’s youngsters – “Generation Y” are being saddled.

The widely used figures on the growth of Public Sector Net Debt are worrying enough. But the more accurate figures to note are those in the Whole of Government Accounts.

These take in debts run up on items such as many of the unfunded promises (i.e. liabilities) that the baby boomers have been making to themselves, notably unfunded public sector pensions, asset shortfalls in the funded schemes, provisions for items such as nuclear decommissioning, clinical negligence and PFI contracts.

The full extent of the burdening of ‘Generation Y (those born between c. 1980 and 2000, i.e. aged between 35 and 15 today) has been brilliantly set out in a paper this week by public finance and pensions economist Michael Johnson (*).

 

Baby boomers, he says, “have become masters at perpetrating inter-generational injustice, by making vast unfunded promises to themselves, notably in respect of pensions. Indeed, such is their scale that if the UK were accounted for as a public company, it would be bust. In any event, Generation Y will have to foot the bill.”

He calculates the gap between the nation’s assets and liabilities grew by an unsustainable 51 per cent in the five years to end-March 2014, to £1,852 billion. At 111 per cent of GDP, this is equivalent to £70,000 per household.

If the State Pension, the largest of all unfunded liabilities (roughly £4,000 billion) is included, the burden per household rises to £221,000.

“Reining back on unfunded promises”, he argues, “means either stop making them, or fund them now, which would require higher taxation (or additional cuts in public spending).

Pre-election pledges have limited the scope for raising rates of taxation, leaving the Chancellor with little choice but to cut tax reliefs and exemptions. His paper focuses on the £110 billion of expenditure reliefs, defended by special interest lobbyists; and also discusses the recent Public Accounts Committee’s excoriating report into HMRC’s general management of reliefs and exemptions.

Policy suggestions include all future unfunded spending commitments to carry an Inter-generational Impact Assessment to quantify the impact on the young, i.e. future taxpayers; an Office of Fiscal Responsibility to scrutinise the effectiveness and value for money of all tax reliefs and exemptions, and all tax reliefs and exemptions made subject to a five year sunset clause, after which they would cease.

His report makes for grim reading but a very necessary antitode to the mood of near euphoria that has beset many Conservative commentators since the election last month.

(*)Who Will Care for Generation Y? by Michael Johnson, published by the Centre for Policy Studies June 4 2015.

No less worrying is our dangerous unpreparedness for an economic slowdown. Features of particular concern include  rising house price inflation, a savings ratio well below that required to provide a buttress for household budgets, household debt levels expected to reach record levels by 2020 and persistent (and chronic) trade deficits.

These concerns, some argue, are by no means new, so why worry unduly? The reason, as HSBC economist Stephen King set out in a paper last month, is that, looking to the pattern of previous economic cycles, we could now be closer to the next recession than we are away from the last.

The crisis and recession of 2008-09 ushered in record low interest rates and Quantitative Easing – “temporary” quick fixes that have proved anything but.

The result is that we have no ammunition left in the policy locker to fire should a downturn head towards another recession. The traditional response to a downturn is to cut interest rates, but these can scarcely be cut further now.

Higher government spending (and borrowing) would smash through the government’s deficit reduction programme. And another dose of QE would almost certainly trigger alarm bells as to whether Western economies can ever be ‘normalised’.

To despair is a sin. But in overlooking these two threats to our economy and well-being I may have committed a greater sin. There is more – much more to “Scotland’s economic prospects” than a tight focus on devolution consequentials and concerns over a post-Barnett fiscal deficit.  I hope this begins to redress the balance.

 

 

 

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