Public debt and the more subtle ways we risk cheating future generations


Sir Boyle Roche was an Irish parliamentarian of the 18th century who achieved a reputation for remarks stupid even by the standards of politicians. “How could I be in two places at once unless I were a bird?” was his excuse for an absence that few of his contemporaries regretted. But another observation — “Why we should put ourselves out of our way to do anything for posterity, for what has posterity ever done for us?” — is the one he bequeathed to, well, posterity.

Public debt — which in Britain is fast approaching 100 per cent of national income — is the method by which we snub posterity today. If we run a deficit of 5 per cent of gross domestic product, we enrich ourselves by 5 per cent at the expense of future generations — at least, relative to how we would have done if we had not run a deficit and everything else had remained the same. I have phrased that sentence carefully to illustrate how many assumptions are needed to interpret the effects of such a policy. There are many concepts of deficit (which more intelligent politicians than Roche readily confuse), inflation is eroding the real value of outstanding debt, and it is unlikely (indeed impossible) that everything else would have remained the same. Still, those of us who do care for posterity cannot but be concerned by our legacy of debt.

But public debt is not the only, or necessarily the most important, means by which we make transfers between generations. If public debt is the liability of posterity, public infrastructure is the asset of posterity. A glance around London leaves one impressed by and grateful for the legacy of our Victorian forebears — the embankments, the rail links into the city, the tube tunnels beneath it, the Houses of Parliament. By comparison, Crossrail, the Millennium bridge, the Shard and the lowest rate of new housebuilding for decades are our rather meagre contributions today.

But it is a mistake to look at the intergenerational effects of public expenditure as a whole without looking at individual components. Education, pensions and health together amount to almost half of total state spending in the UK, and all of these are heavily directed towards the young and the old. Education and pensions, rather obviously: and health expenditures increase rapidly with age, with over 65s incurring average annual health costs of about twice the level of the general population.

A still more subtle, yet more substantial, means of cheating posterity is through asset prices. The housing stock is by far the largest element, by value, in our national assets — amounting to about 2.5 times national income. That means a 1 per cent rise in house prices is equivalent to a transfer of wealth of about 2.5 per cent of national income to those who already own houses from those who might buy them in the future. The intergenerational effects of last year’s rise of 10 per cent in UK house prices therefore swamps anything the chancellor of the exchequer might have done to eliminate the budget deficit.

While homeowners will take some of that in equity release for round-the-world cruises, more is likely to be passed to children and grandchildren through inheritance. Much of that inheritance will be received by households whose members are themselves in their fifties and sixties — so that high house prices do less to fund round-the-world cruises for the elderly than to fund round-the-world cruises for their children. Inequality in one generation is thus transmitted into inequality in the next.

Two decades ago, the American economist Laurence Kotlikoff proposed a structure of “intergenerational ac­counting” to enable us to better understand the ways in which our actions today impinge on the welfare of generations to come. Only if we develop and broaden that framework can we start to address the question Roche put to his fellow parliamentarians 350 years ago.

This article was first published in the Financial Times on January 21st, 2015.

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