Britain’s long-term outlook is suffering as the coalition pursues medium-term gain

The government is to be applauded for its attempts to get the medium-term public finances under control. However, its enthusiasm to do so is leading, increasingly often, to decisions that will mortgage the future to the benefit of the coalition. The government seems to have a time horizon of precisely five years. Beyond that, debt is somebody else’s problem.

The latest example to hit the headlines again is that of the Royal Mail pension fund. Because the Royal Mail’s pension fund is an albatross around the publicly-owned corporation’s neck, the government wants to take responsibility for the fund in order to ensure a quick privatisation of the Royal Mail. This involves the government taking the assets of the fund – about £25bn – onto its balance sheet while taking responsibility for the future pension liabilities. Interestingly, because of the way the government does its accounting, these liabilities do not appear in government borrowing and debt figures. So the government appears to be getting a windfall of £25bn. In fact, it is also taking on pension liabilities of up to £50bn (there is a deficit in the fund) but sweeping those liabilities where the rest of the long-term public pension sector liabilities go – under the Treasury carpet. The bills will be picked up by future generations of taxpayers.

I would have no objection to the continued nationalisation of the fund. It may not be in anyone’s interest to privatise the Royal Mail while giving it the legacy of a pension fund deficit. The pension fund is currently a state-run fund, but it is one that contains real assets. This situation could continue and the fund could be ring-fenced. Instead it is to be replaced by a scheme with no assets – the money will be used to make the UK’s national debt look smaller and give future governments a licence to spend more money.

Indeed, we may not have to wait very long for the politicians to get their hands on the money. Already, government back-benchers are pressurising the government to sell the assets and use the money to spend on government infrastructure projects.

This example shows why we desperately need better public sector accounting that makes proper provision for pension liabilities – just like the government requires of the private sector. Britain is following the example of Argentina and Hungary in taking pension fund assets onto its balance sheet and then using those assets for apparent debt reduction while taking on board a huge level of future liabilities that do not appear in government accounts except in the depths of documents several hundred pages thick.

Unfortunately, this is not the only example of government “medium-termism”. Wherever you look, the coalition is mortgaging the future. Next month, the government is abolishing contracting out from defined contribution pension schemes. It will no longer be possible to take a rebate of national insurance contributions and invest it in your pension scheme. What will happen instead? The answer is simple. The government will take the national insurance contributions, spend them, your pension saving will be reduced and the government will take on the additional pension liability. The £2bn a year in extra national insurance contributions will be spent today and no provision will be made for the government’s additional pension liabilities.

The government’s pensions Green Paper proposes going all the way and abolishing contracting out for everybody and the government has made it clear that this is its desired path. Once again, the effects are clear. Over £7bn extra will flow into the Treasury and be spent. Meanwhile, saving will be reduced, costs on employers will rise and the government’s future pension obligations will increase.

Indeed, the government seems to be pursuing medium-term goals with missionary zeal. It recently caved in to the unions on public sector pensions. But, cleverly, it took a decision that will increase government costs by up to a third, but back-loaded those costs so that they will not be felt until the coalition is dead and buried.

The long-term trends in government finances are grim. The Office for Budget Responsibility’s report on this matter produces projections for pensions, long-term care and health spending which should be deeply worrying. Against this background, we have a government taking action that almost nobody understands to reduce private saving and increase pension obligations. In doing so it is tearing up arrangements that have been supported by ministers as extreme as Tony Benn and Barbara Castle and promoted by successive Conservative and Labour governments. This is not a good time to be entering the labour market. The very-long-term outlook for the UK taxpayer is not good and this government is making it a lot worse.
This article first appeared in City AM, and can be found here.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.