In a paper published by the IEA today, A Bankruptcy Foretold: The UK’s Implicit Pensions Debt, I calculate the UK’s total debt to be £4.1 trillion or 276% of GDP, as opposed to the official figure of around 40% of GDP. This makes our “real” debt position worse than Zimbabwe’s. Many other West European and North American governments are probably in a similar or worse position.
This figure is so large that I suspect it will be greeted with disbelief and not taken seriously. However, I want to stress that this really is our debt position, and I have deliberately been over-cautious in the calculation – the true level might actually be higher.
The debt figure is made up of “official” debt, public sector pension liabilities and accrued National Insurance Fund liabilities. In the paper I present a rigorous argument as to why this is a real debt, which it will be very difficult for governments to get out of paying. Indeed, the debt level is likely to increase as the demographic situation worsens.
So, what does this mean for the country’s future outlook if our debt level is indeed so high?
The debt the government carries represents the level of transfer to future generations – the debt will have to be paid off out of the government’s future tax revenue. The population has effectively promised itself a pension without setting aside a capital fund in the hope that, in the future, there will be enough taxpayers. But we are at serious risk as the demographics deteriorate further as there will be fewer tax payers to pay for an increasingly large burden.
If the government acknowledges its true debt level, it will have to behave like a highly indebted person – with extreme prudence and the introduction of austerity measures. It will be forced to cut spending, increase taxes, possibly print money to pay off its debts, and almost certainly look to break its pension promises.
While none of these options are at all appetising, the situation will keep on getting worse the longer the government delays paying off or reducing its debt. The options available will decline with time and those that are left will be increasingly painful.