Kristian Niemietz Blog

published on the Institute of Economic Affairs (IEA) blog, January 2009

In a recent IEA discussion paper, Nick Silver argues that official figures display less than a fifth of the UK’s actual public debt. This is because pension entitlements constitute debt in all but name.

The Berlin-based Stiftung Marktwirtschaft, a pro-market think tank, has now released a cross-country comparison of unfunded government liabilities which appears to confirm these findings.

Stiftung Marktwirtschaft uses a model called ‘Generational Accounts’, in which current government expenditure is arithmetically allocated to age-groups. Assuming that spending per age group will stay constant in real terms, total spending is then calculated to fit the expected age composition in about 50 years. In addition, expected future spending is contrasted with expected future revenue.

Note that while Nick Silver strictly separates ‘future expenditure’ and ‘debt’, no such distinction is made here. The Generational Accounts do not take into consideration whether the government is legally committed to a particular spending path, or whether this is merely an expectation of the electorate. They do, however, give a reasoned estimate of the likely changes in spending and/or taxation.

The results are devastating. Of the eight countries examined, only one, Switzerland, has a sound balance sheet. The UK, in contrast, is burdened with invisible liabilities of 530% of GDP, on top of its official debt. To meet these obligations, the tax and contribution ratio would have to be raised by a fifth, or spending would have to contract severely.

Unfortunately pension, healthcare and long-term care systems operate on a pay-as-you-go basis in nearly all wealthy countries, including the UK. If these systems were fully funded, people could have built up capital reserves long before the age pyramid started to crumble. Reform is still desperately needed but it will become increasingly difficult to make up for lost time.