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Spending Cuts, Student Revolts, and the Debt Crisis

It has been impossible not to notice the widespread student protests over the past couple of months against the government plans to raise tuition fees.  News reports have fluctuated between scenes of peaceful protest and more frequently, of scenes of chaotic violence, street brawls and vandalism.  Clearly if a point is worth being made, it is worth being made aggressively.

To more mature eyes these protests can appear to be nothing more than an almighty temper tantrum.  After all the justifications for the protests seem somewhat incoherent, ranging from refrains of “it’s not fair” that students should have to pay because the bankers created a crisis or “it’s not fair” since their parents attended university for “free”.  “It’s not fair” is the refrain of many a child when a parent refuses them “sweeties” or a stuffed toy for reasons known only to the “mean” parent.  As a child is dependent on its parents for its day to day living, many in this country have become dependent on the State for food, shelter and education.

Doubtless it has occurred to very few prospective students that perhaps paying for your own education, of which you will likely be the main and possibly exclusive beneficiary, is perhaps quite reasonable.  Certainly, in other countries — notably the USA — this is perfectly normal.

Interestingly enough, the debate appears to have taken place within a certain vacuum, in which certain questions have not been asked and have certainly not been answered.  The first question to ask is why students should not pay for their own education?”  The second, and more important question is whether the Government afford to pay anything at all towards education, university or otherwise?

The answer to the first question is intertwined with questions of fairness and entitlement.  In the UK over the past say, sixty years, we have been brought up to believe that we should all compete on a level playing field.  We are entitled to a free education, free healthcare, guaranteed employment or unemployment benefit when we are out of work.  We have a right to housing and a free pension when we retire.  There are countless other “rights” and “benefits” that we should have by virtue of being alive.  Not only are we entitled to a psychologically rewarding job but we are entitled to a fair wage.

It is fair to say (no pun intended) that the State has created an entitlement society where citizens without question assume these rights are self-evident and that they will continue indefinitely.  The mere notion that these rights are unsustainable is inconceivable to the citizens.  The idea that a student should pay for his own education is therefore too preposterous a question to pose.

At every turn the State has convinced the citizenry that these rights can be provided at will and continuously.  The dogma we are taught at school or fed to us through the media keeps us convinced.  Everything in society should be “fair”.  Unfortunately, the State’s own insistence that it can and should provide these benefits has provided the foundation for the massive protests we have seen and worse protests to come.  The State has studiously avoided explaining to its citizens the economics behind the benefits it offers.  To ask the average person the question of how these benefits are are to be paid for, it is as if one were speaking a foreign language.   Most people have a vague notion that taxes will somehow cover it.  They are aware that there is something called a “deficit” and something else called a “debt” but have little clue as to what these concepts have to do with them.  For some time, it has been to the advantage of the State to promote this kind of ignorance.  But now, the money is running out.  The benefits need to be cut.  And unfortunately the children do not understand.

This feeds naturally into the next question: can the British Government afford to pay for its citizen’s university education?

Britain currently has a budget deficit of approximately £149bn and official gross debt of £1.1 trillion (tn) – according to the Maastricht definition – forecast for 2010 to 2011.  Interest payments on this debt are forecast to be £44bn.  If we hold the budget deficit constant for the foreseeable future it is plain to see that the debt will increase by £149bn each year.  This in turn means that interest payments will increase each year.  Looking at this simplistically, drawn to its logical conclusion, this means that the interest payments will eventually crowd out the rest of the budget leaving no money for students, single mothers, the police or anyone else.  We would all be paying taxes just to pay the debt.

Most likely the Government would default a long time before reaching this point.  Therefore, it is important to gauge how close Britain is to bankruptcy.  Current GDP is just over £1.4tn.   We will leave aside the theoretical issues with GDP and for now assume it is a good proxy for the national income of Britain.  In this case we have a debt to GDP percentage of 79%.  The last time it was so high was during the mid-sixties when Britain was still recovering from an astonishing post wartime high (late 1940s) debt of over 230% GDP.  The average debt to GDP percentage over the past 20 years was 40%.  Total government expenditure for 2010-11 is forecast to be £697bn (50% of GDP).  Receipts forecast for 2010-11 are £638bn.

It might be objected that historically speaking the current debt figure is not disastrous since Britain survived the post-war debt.  However, while Britain survived the post-war debt crisis the British Empire did not.  As one colony and then another departed the ever diminishing Empire, ultimately Britain lost its “Great Power” status and was replaced by the United States in many of the regions that Britain previously dominated.  Furthermore, because Britain was virtually bankrupt after the Second World War, it was forced to accept the onerous Anglo-American Loan Agreement from the only friendly “World Power”, the United States.  Britain endured decades of economic depression and turmoil, suffering the loss of its manufacturing base and becoming known as “the sick man of Europe”.  Britain only really began to recover in the mid-Eighties.  It is fair to say, this is not a time we want to revisit.

According to the Government’s recent spending review (November 2010) the recent spending cuts will result in total spending cuts of £81bn by 2015.  This implies that the country’s debt will rise to 93% of current GDP by 2015 and interest payments will rise to £63bn per year (the third largest line item on the Government’s budget and larger than the entire education budget).  If no cuts are made then Government debt could rise as high as 121% of current GDP with interest payments greater than £78bn.  If the cost of servicing the debt rises above 13% of government revenues the country will have its credit rating downgraded (a definite prospect in the latter case).  This in turn leads to higher interest payments, greater difficulty in securing debt financing and increases the probability of cash-flow insolvency.

None of this considers the upward pressure on expenditures caused by the rising pension liability (contributing to a total on-balance sheet and off-balance sheet gross national debt of £6.5tn).  So while GDP may or may not increase over the next five years, expenditure certainly will increase.

As we can see, Britain is teetering on a knife-edge.  Another crisis such as the recent banking crisis (and it has not finished yet) could push Britain over the edge into bankruptcy and a repeat of the misery of the early post-war years.  Britain cannot afford to pay for student university fees or much else at the moment.  Clearly, the relatively conservative spending cuts will still result in a dangerous increase in debt and interest payments.  Without these cuts being made today, harsher and more drastic cuts will be made in the future.  The welfare state has had its day and it is crumbling.

Prospective university students are a fairly small and powerless group which is probably why they were among those targeted for these relatively minor cuts.  Given the considerable amount of disruption this small group has caused after being asked to contribute more for their subsidised education, it is disturbing to contemplate the public disorder that would likely erupt should more drastic cuts occur down the road.  It is not fair that the students should pay for university when their parents attended for free.  Likewise it is not fair that people who do not attend university should subsidise those that do.  More importantly, it is not fair that any of us living today should contribute to the future bankruptcy of this country and the squandered opportunities of our descendants.

The only moral and fair solution is a continuous and sustained reduction of the size of government in Britain. This will result in an increase in the prosperity of everyone living in this country and will make Britain a shining example of free-market economics to the rest of the world.

7 comments to Spending Cuts, Student Revolts, and the Debt Crisis

  • Yes, of course you’re right. But the public, even the politically-astute public, don’t believe a word of it. It will take disaster to strike before real change happens. And even when disaster strikes – the wrong things will be blamed and the wrong action taken.

  • Current

    Unlike your last post, I agree with you about this. Even if there isn’t a debt crisis the cost of maintaining the public debt will be very important in the future.

    • Robert Sadler

      Well Current, I think on most things you and I agree. Its just on some of the details where we differ.

  • Robert Sadler claims that big interest payments on the national debt will make other items of government spending unaffordable. That is not true because those interest payments are just a transfer from one section of the population (taxpayers) to another (Gilt owners). That is, there is no effect on the private sector’s ability to fund government.

    As regards the section of the national debt owned by foreigners the effects are more complicated. I won’t go into that.

    RS also claims that the loss of the British Empire since WWII is in part attributable to the high national debt immediately post WWII. That argument is undermined by the equally large national debt (relative to GDP) just after the Napoleonic Wars. During the next hundred years, the empire thrived.

    • mrg

      According to the DMO’s Quarterly Review for Jul-Sep 2010, 30% of gilts are held overseas. It’s a significant enough portion that I think further discussion is warranted.

      That aside, it is hardly a matter of indifference that the productive portion of society is squeezed to pay domestic gilt-holders. At some point, the taxpayers will decide they’ve had enough.

      We could introduce a tax specifically targeting the gilt-holders, perhaps up to 100% of their rents, but that would be default by another name.

      However you slice it, our current trajectory is unsustainable.

      For my money, the best option is outright default, followed by a prohibition on government borrowing.

    • Robert Sadler

      Hi Ralph,

      To my knowledge, British debt at the end of WWII was about 29 times the absolute debt Britain had incurred by the end of the Napoleonic Wars. There is no pre-WWII GDP since this measure was created just before the war. If you have some other figures on these two debt amounts please let me know.

      It is irrelevant to whom the Govt owes the debt. If interest payments crowd out the budget it would be impossible for the Govt to function. There would be no money to pay for basic Govt functions such as police protection and contract enforcement.

      In any case the credit agencies would downgrade the British Govt a long time before this point was reached. They base their analysis of the amount of debt and interest payments vs GDP, among other things.

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