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May 20, 2013 | by  | in Features |
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Party Now, Pay Later: New Zealand’s Intergenerational Debt Problem

Consider the slogans of our political parties last election:

National: a brighter future.
Labour: a fairer future.
Green: a sustainable future.

We sense a non-partisan riff: the future matters. Green Party advertisements told us to vote for them so that children could grow up playing in rivers, not sewerage, and the Greens received more votes than they ever had. A majority voted National over Labour because more people bought shonky John Key’s plan for the future than they did Phil Goof ’s.

But amidst the rhetoric and sloganeering of ‘deficit reduction’ and caring about the next generation, governments globally have done very little to stave off the debt problem. To paraphrase an old, warmongering British Prime Minister, democracy is not that great. It creates a culture of spending without cost, where reckless policies are paid for by the future generation.

The general feeling is that we are living in a society of austerity. Governments globally are cutting back on crucial social services in order to respond to the comical quantities of debt they have burdened themselves with. Government is shrinking. Welfare is being cut. Jobs are being lost. Margarine is being bought instead of butter. But this perception is misguided. In actuality, governments today are spending more than they ever have. Despite claims that the National government has engaged in a programme of slashing spending, the truth is that they have spent, and continue to spend, more than the nine years of “reckless” Labour spending before it. Under Helen Clark in 2004, government spending equated to 29 per cent of GDP. Today, that figure is 42 per cent.

But didn’t Bill English just say that we would return to surplus next year? Well, yes. But the fact that this Government is approaching surplus does not mean we are out of debt. All it means is that we have enough money to make the necessary debt repayments. Think of it like this: if you have $100 in your pocket at the end of the week, then you are operating at a surplus. But that doesn’t change the fact that you still owe tens of thousands of dollars on your credit card or on your student loan. You’re happy because you can buy yourself something nice now, but future-you is still going to be poor as hell.

Around the world, a similar story is being played out. In America, both Congress and President Obama are constantly being criticised for gutting public spending. David Cameron’s Tory government is facing the same criticism. The truth is that the only thing being cut is the rate at which spending is increasing. Say the Government promises that they will provide $10 million of additional education funding, but then only increase the education budget by $5 million. The Government is still spending more money, just not as much as they’d promised. There is no spending cut. Consider also the fact that on the supposedly austere continent of Europe, every single government continues to spend more money than it earns in revenue, and it’s clear that austerity is a myth. You would be hard-pressed to characterise our political climate as austere: as the Iron Lady’s wet dream; what Ronald thought about when Nancy was out.

Which is odd given what we noted earlier, which is that politics has become obsessed with controlling debt, with being economically ‘sustainable’, thinking about the children. Yet amidst all that, very little has changed, even when it would be politically savvy to do so. Why?

Firstly, although voters like the concept of voting selflessly to preserve our future, we like other things as well. We like Working for Families. We like early retirement. We like interest-free student loans. We like America’s Cup yachts. Especially when we don’t have to pay for them. The public want these services and so are happy not scrutinise the real efforts made by governments to tackle debt as closely.

Further, governments are able to hide the fact that they are not confronting the debt problem. Debt is a complex issue. Most people don’t really get it. Where does it come from? What is the ‘right’ amount of debt? How do you measure the amount of debt a country has? What is a low-yield government-bond security? We just don’t know. This makes it easy for government to spout fiscally responsible rhetoric, knowing the whole time that people don’t understand it. They probably don’t understand debt either.

We can’t lay the blame squarely on evil politicians for our inability to understand government policy however. If we really wanted to, we could go to the Treasury website and learn all about Core Crown Expenditure. We could take a course in Public Finance at uni. But why would we? What’s the benefit to us? We might learn all about fiscal policy and vote accordingly, but it’s likely most of our peers are doing less nerdy things with their spare time. They’ll continue to vote as they always have and nothing will change. For the hours of work we put in, the reward is zero. The truth is, although we say we care about future generations, we don’t care about them enough to go out of our way to learn how to save them.

What does debt mean for us?

Debt leads to reckless spending. Governments are traditionally stuck between a rock and a hard place: on the one hand, they want to lower your taxes so that you vote for them. On the other, they want to give you heaps of benefits and free stuff so that you vote for them. Obviously, these two ends can’t be reconciled conventionally; it has to be one or the other. But governments are nothing if not crafty, and this is where debt comes in. By borrowing money, John Key and Bill English are able to have their cake and eat it too: tax cuts and spending increases for everyone. The problem is that in order to do this, they are binding future generations who must shoulder the cost of the debt, with interest. Taking candy from unborn babies is pretty low, even for those two.

It is particularly dangerous when we consider that governments are typically pretty bad at spending money. When you spend your own money on something for yourself, you generally spend it very carefully. If you buy yourself a shitty lemon instead of a sweet orange, you’ll be pretty sour because it’s you who has to eat it. Governments spend other people’s money buying things for other people, so aren’t faced with the same pressure to buy good things. This is why government programmes are generally less efficient than private ones; if a company is wasteful, then they will go bankrupt. If government programmes are inefficient, it can always just borrow more money.

It is also expensive. Borrowing requires service payments: the interest payments on debt. As ACT Party leader John Banks told Salient, “…[w]hen a Government spends more than it raises in revenue it has to borrow, and serving that debt often comes at a high price.” In the United Kingdom, £2000 from every household goes just to servicing debt. Minister of Finance Bill English noted in his Budget Speech last Thursday that servicing our debt costs the equivalent of funding the police, early-childhood education and the Unemployment Benefit combined. That is an egregious waste which people should be able to spend making their own lives better.

Finally, a pattern of increased spending on new programmes and initiatives is nigh on impossible to reverse. ‘Entitlement’ can sometimes be a dirty word in politics, but it is pertinent here. We get used to the nice things government provides us with. It’s nice not to have to pay interest on our student loans. It’s nice that people over 65 get money from the government, regardless of whether they’re a millionaire or not. It’s nice to have a Families Commission, even though nobody knows quite what it does. It would be political suicide for a party to cut any of these things because the public has become accustomed to them.

Take superannuation for example. It is an indictment on our country that nearly 13 per cent of the total budget is spent on superannuation. Despite the fact that people are living and working longer than when the scheme was introduced, and the reality that it is financially unsustainable, John Key has said he would rather resign than implement sensible changes such as adding a means-testing element and gradually raising the retirement age. Reform is impossible because of our status-quo bias; people expect to be supported as soon as they turn 65 because it’s what they are used to. A new policy places on the next government an obligation to continue it. It is politically easy to create programmes, but downright impossible to stop them. Meanwhile, the borrowing continues.

What does that mean for those in the future?

We are committing grave moral, democratic and governmental sins against our progeny.

First off, we are stealing money from future New Zealanders to cover our own decadence. There is some debate about whether tax is
theft (given the fact the police will shoot you if you resist arrest for failure to pay taxes, it may well be), but there can be no mistaking that leaving our descendants to pay for loans that we took out is daylight robbery.

Intergenerational debt represents a serious threat to democracy. When a majority of people vote for National, it means that they are consenting to their tax dollars being spent on the things National campaigned on during the election. Without this authorisation from taxpayers, a government has no mandate to spend. In the case of long-term debt, the people who have to ultimately pay for repayments are either not of voting age or are not yet born. The end result is that future people will have to pay for policies which they could not and would not have voted for.

The practical effect of intergenerational debt is preventing our grandkids from realising their potential. How’s this? Well, it means that all subsequent governments are bound to repay their debtors. The money they are forced to spend paying off interest on a debt they never agreed to can’t now be spent on health or education or the police or tax cuts. Our descendants can’t choose how to spend their money.

The problem with debt is that eventually you run out of future people’s money. Greece, Cyprus, Portugal and Italy all attest to this. The debt reaches a boiling point, where something has to be done. It places nations in a position where the debt becomes unsustainable, where they are unable to even service the debt and are forced to make cuts.

Look no further than the savage demonisation of Thatcher’s Britain for evidence of such a reality. After her death, people hurled abuse at her and her memory, finding her culpable for the suffering of the 80s. But let’s scrutinise that. She arrived in a Government where even liberal Liverpudlians were writing songs against the Tax Man who took over 95 per cent of their money, where government spending was bloated and people felt entitled to their cushy unionised existence. Where subsidies for the wealthy were rife and paid for by the poor and the future. Thatcher confronted that reality. Roger Douglas did the same here.

Bastards, you say. The scoundrels of a neoliberal agenda. Fervent evangelicals of Friedman and Hayek. Wrong. They are merely symptoms of a wider malaise. They were forced to respond to a governmental system that incentivises debt-piling. Where government after government have spent what they did not have. To put it simply: members of unions who lost their jobs under Thatcher are wrong to only hate Thatcher. Their fury should focus on those before her: the Labour leaders they loved.

Philosophy

This debt culture seems wrong. Derek Parfit, a British philosopher, disagrees. He describes what is known as the identity problem:

The Government introduces a policy to support new mothers. They borrow to do so. Intuitively, we think that that is wrong because we are harming (financially) those in the future for our benefit. It is akin to theft. Not so, declares Parfit. For there is no person in the future that we are harming. They do not exist and further there is no certainty that they will exist. Given that even a tiny change in the time at which you have sex will alter who is created (lots of sperm etc.), then policies that are implemented by governments also will change who is created. Our actions to ‘help’ or ‘hurt’ the future change who it is we are hurting or helping and thus make it illogical to say that we are actually harming anyone. The policy may be worse for future generations, but it also changes who the future generation is. They are not helped or hurt. They are merely created.

So maybe we should conclude: fuck deficit reduction; fuck climate change. I want my Gatsby existence. Gimme my fossil fuels and lower taxes. And free champagne too.

This theory seems intuitively wrong. Parfit himself found it “repugnant”. Perhaps the response is that we do not need to know specifically who we are transgressing in order to do wrong. We just need to know that there are people that we will do wrong to. Their names are not so key.

So, what is the cure for this debt malaise?

A preventative cure?

Salient asked politicians whether they would support a law that limited the amount of government debt by implementing a cap on borrowing. ACT leader John Banks suggested a cap on spending would work better. “Requiring the Government to tell Parliament just why they have had a blowout in spending will make it less likely to occur. Debt is simply a result of not controlling spending. Reining in spending is where we must focus our efforts.” In theory, a cap on spending sounds like a very good way of limiting borrowing, but in reality it is unlikely that a cap would be effective, as a simple majority in the House would allow the Government to ignore the cap.

No more democracy?

Malcolm Bull, who teaches at Oxford, argued in the London Review of Books that trustees should be appointed to represent the future, as a means for tackling climate change. These trustees would have the power to override the legislature to prevent them from passing laws which would have bad consequences for future generations. Democracy is put on the back burner. The interests of the unborn future and dead past may both be represented in some form of aristocracy.

However, Bull himself doubts the ability of these trustees to do what is in the interests of those they are representing. Further, it may lead to more fundamental issues over the exercise of that power: how would the people be appointed, and what legitimacy would their decisions have if not supported by popular will? Bull’s conception of government may help solve the problem of intergenerational debt but brings with it bigger problems.

Generational accounting?

As noted earlier, politicians are able to purport to be resolving the debt issue because it is so complex. Generational accounting places debt firmly on the agenda. It works by placing less importance on statistics such as debt-to-GDP ratios, and uses other demographic features to help guide policy. For instance, if the projected birth rate in a country is set to fall, there will be fewer taxpayers in the future, meaning policies will have to be scaled down to respond to that fact.

Reducing the voting age?

The voting age may be reduced to allow youth to have a say in the society they will grow up into. From a rights perspective, this seems sensible, but in terms of solving debt, its efficacy is limited. It is unclear that 16-year-olds, if they were to come out and vote, would have a more long-term focus than other members of society.

Lengthening the election cycle?

We could extend the electoral term from three to four years. This may lead to calmer, more rational budgets. The temptation to promise expensive novel programs for short-term political gain would be lessened as governments would have longer for their fiscal policies to take effect. Although the theory seems plausible, evidence suggests debt continues to grow. The United Kingdom has a five-year cycle, Brazil six: both have large reserves of debt.

A future commission?

In characteristic Scandinavian fashion, Norway has a progressive alternative. There, they have a Future Commission, not dissimilar to a Select Committee in New Zealand. When a Bill is being debated in Parliament, the Future Commission will submit as to whether the Bill is likely to be good for future generations. This makes debt and climate change more of a live political issue, and would likely nudge the public slightly more towards intergenerationally just policies. However, New Zealand is generally apathetic to such Committee submissions. Attorney-General reports that highlight breaches of the Bill of Rights seem to go almost unnoticed by the public. Perhaps the same would occur for this Committee.

It seems clear that there are many options available to governments to address this moral and social issue. Simply doing nothing is intellectually lazy. Our current penchant for partying now and hoping someone else will pay later needs fixing. It is too easy to live in our interest-free opulence and hope someone else born later in a better time will do something about it. Get off the couch. Malcolm Bull, writing on climate change, discerned:

“The current generation is in danger of becoming the squeezed middle—a victim of the careless excess of the past, yet still obliged to save all its resources for the needs of those to come.”

Perhaps he is right. But past failure does not justify continuing inertia. The fact that history books tell of governments implementing reckless policies should not be a barrier to creating a more sustainable future, whether that be financially, as we have argued, or environmentally. Let us be the “squeezed middle”. And be proud of it.

 

How does a government borrow money?

– Poor nations generally borrow from the World Bank or the International Monetary Fund.

– Most nations don’t use banks however.

– When a government wants to borrow, it produces government bonds.

– Government bonds are pieces of paper which other nations and institutions purchase.

– The bonds are a promise to pay back the buyer the amount they paid for the bond, plus interest, on a certain date.

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