Not reducing debt is the greater danger
Whilst it might be presumptuous of me to disagree with the sixty eminent economists who wrote to the Financial Times last week, I would like to refer them and the reader to my paper A Bankruptcy Foretold, published by the IEA at the end of 2008. I calculated that, if you include accrued pensions commitments, then the UK government’s debt was a shocking 270% of GDP – over three times higher than the official figure used as evidence by Lord Layard et al. Moreover, the effects of the banking crisis and fiscal stimulus mean the situation will have worsened considerably since my research was undertaken.
Now one gets a sense that for some reason pensions are viewed as not being a “real” debt, but they are a legal contract that the government has entered into and will have to be paid, just like any other government debt. Baby boomers are starting to retire now – so pensions are not a distant future promise, but have a similar term to other forms of debt. Corporate and public accounting standards recognise this, but the government chooses to ignore these standards. So in advocating continued fiscal stimulus, Lords Layard, Skidelsky and others are addressing a minor risk (that the UK will fall back into recession) whilst ignoring a major risk (that we will spiral towards some form of bankruptcy). The government should formulate a credible deficit reduction plan before it has no choice.