Higher taxes won’t fix Britain’s debt time bomb

Even optimistic projections of future health spending suggest that we face a fate worse than Greece

The great advantage of forecasting the long-term future is that few if any of us are going to be around for long enough to see if our predictions come true. Whatever we say now will be forgotten by the time we get there. What the world will look like 50 years from now can be a matter only of speculation; any forecast ventured is certain to be wrong, and very likely wildly so.

I couldn’t help but think this on reading the Office for Budget Responsibility’s latest Fiscal Sustainability Report, published this week. This contains some deeply worrying projections on the long-term outlook for the public finances, such that were they actually to come to pass, Britain would be pretty much bankrupt – as bad as, if not worse than, Greece.

Even on relatively optimistic assumptions about demographic trends and healthcare costs, public debt is projected to balloon to well in excess of 200 per cent of GDP over the next 50 years; if we assume the desired lower levels of immigration, and the likely continued inflation in healthcare spending that comes from improved treatments, debt will ruinously expand to more than 300 per cent of GDP. The Government’s recent commitment to more money for the National Health Service strongly suggests the latter.

If something cannot go on for ever, it will stop, Herb Stein, Richard Nixon’s former economic adviser, famously said, and this is a classic case in point. The OBR’S numbers are not forecasts as such, but merely illustrative projections of what might happen if nothing is done to prevent it. They serve as a wake-up call to policymakers, even if there is not much evidence of the politicians observing it. The Treasury’s response was merely to insist that debt would be kept under control come what may. There was virtually no explanation of how.

The basic numbers are these: the growing healthcare costs of an ageing population would, all other things remaining the same, cause noninterest spending to rise from 36.4 per cent of GDP today to 44.6 per cent by 2067/8 – an increase of 8.2 per cent of GDP, or £172.8 billion in today’s money. Unless taxes are raised, or other forms of spending are cut to pay for the demographics, the budget deficit will soon start to mushroom again, eventually reaching the sort of levels that occurred in the depths of the financial crisis.

Worse, the OBR’S analysis might, if anything, somewhat understate the seriousness of the situation, for the analysis is framed around relatively optimistic assumptions about growth in productivity and output.

What is more, we are talking here only of the so-called “primary deficit”, ignoring debt servicing costs. If interest costs were a department, they would already be the third largest in Government. Any combination of rising deficits and interest rates might cause them to spiral out of control, eventually reaching that point of no return called insolvency.

But, of course, that’s not going to happen. Markets and voters will force change long before we reach such a state of fiscal meltdown. What’s so depressing about today’s debate is the weary acceptance, apparently on both sides of the political divide, that the gap is going to have to be filled by tax rises.

It’s true that some economies seem to manage reasonably well on tax burdens of 45 per cent plus – notably France and the Nordics. But we know that Britain would struggle under such a weight. Whenever the tax burden rises much above 40 per cent of GDP, things start to go badly awry. Experience suggests that the UK economy is structurally incapable of growing with taxes this high.

Is it in any case morally acceptable to adopt a kind of “bread and circuses” approach to tax and spend, where taxes on business and the relatively well-off fund welfare for the masses that they don’t use themselves? That way lies decline and fall.

Two observations seem appropriate. One is of the urgent need for a proper debate over the future of healthcare funding. There is only so long it can be ducked. The latest sticking plaster solution is a woefully inadequate response which merely puts off the day of reckoning. If we are to have higher taxes to pay for healthcare, let it be through Continental-style social insurance, payable by all according to means. That way, the connection between service provision and payment is re-established.

The second observation is that, regardless of rising healthcare spending, Brexit will inevitably drive a low tax agenda, not just for the purpose of attracting investment and talent, but also, paradoxically, to meet the fiscal challenges so graphically laid bare by the OBR. These shortfalls are not going to be closed by higher taxes.

I don’t argue that lower taxes will of themselves deliver the enhanced growth and productivity necessary to sustainably fund the welfare promise. The evidence on whether tax cuts automatically trigger higher growth and therefore tax revenues is mixed. But what I do know is that higher taxes are likely to be a self-harming strategy of despair.